This was our key takeaway in our WFC Q3 earnings preview yesterday (here):
Add it all up, and the potential for significant earnings growth for WFC over the next year is unlikely. WFC management is likely to acknowledge as much. The real question that analysts will be asking on the earnings call will the extent of the impact of higher rates on residential real estate.
Regardless, this is relatively stable company with a fair valuation on no major wild cards. For now, we don’t expect major fireworks from earnings.
We identified $39 as important support, and $42.50 as notable resistance for the near-term in WFC. With that in mind, we wanted to present a couple structures that looked interesting to us, depending on your own bias and style.
Both of these structures are net short volatility, since we do view WFC as most likely range-bound after earnings, and hence would not want to net buy premium.
1) For Protection against Long stock, Sell the WFC ($41.10) Nov16th 42 Call, Buy Nov 40/38 Put Spread, Collect 0.05 Credit.
-Sell 1 Nov16th 42 Call at 0.56
-Buy 1 Nov16th 40 Put for 0.86
-Sell 1 Nov16th 38 Put at 0.35
2) For Leverage, Sell the WFC ($41.10) Nov16th 39 Put, Buy Nov 42/44 Call Spread, Collect 0.15 Credit.
-Sell 1 Nov16th 39 Put at 0.55
-Buy 1 Nov16th 42 Call for 0.56
-Sell 1 Nov16th 44 Call at 0.16
In a staid name like WFC, we don’t think it makes sense to play for an outsized move in either direction from here. We are relatively neutral, but these are structures that are good risk/reward if you have a directional view.