Wells Fargo's Stock May Soon Reverse Lower

May 27, 2020 1:52 PM ETWells Fargo & Company (WFC)80 Comments

Summary

  • Wells Fargo stock has seen a massive rally off the May lows.
  • Options traders are betting that the stock falls by July.
  • The fundamental outlook is very weak.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

Wells Fargo (NYSE:WFC) has risen sharply off its May 14 lows, but it seems that the rally may not last. Options traders are betting the stock heads lower by the middle of July. The equity is not cheap when compared to its peers, and that may hurt the stock ability to rise much from its current levels as well, as it already one of the most expensive bank stocks.

The one benefit the stock has at the moment is that it trades with a price to tangible book value that is well below 1 and is one of the cheapest in the group on that metric. Still, with very low interest-rates, and uncertainty around the economic rebound, Wells Fargo stock may struggle. You can now track all of my free articles on this Google Spreadsheet I have created.

Betting Shares Fall

On May 27, the open interest for the July 17, 2020 puts rose by more than 35,000 contracts at the $30 strike price. These puts traded on the ASK for $4.30 per contract, an indication the puts contracts were bought. For a buyer of the puts to earn a profit, the stock would need to fall by roughly 5.5% to around $25.70 per share.

But there is more because this appears to be part of a spread transaction where the trader sold the $30 calls, with the open interest rising by about 34,000 contracts. These contracts traded between the bid and the ask for about $0.67 per contract. By selling the calls, the trader took in the premium of $0.67 per contract. The calls were sold to offset some of the cost of buying the puts.

Overall it creates a bearish bet that Wells Fargo stock is at a lower price than it is on May 27 of $27.18.

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This article was written by

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Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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