Shares of megabank Wells Fargo (WFC) have traded mixed over the past month, as the company largely missed on earnings. Over the past year, shares have been trending up. However, one trader sees a possibility for a big drop in shares at some point before next spring.
That’s based on the April $32.50 puts. Over 16,015 contracts traded, a 96.5-fold rise in volume compared to the prior open interest of 166 contracts. The buyer paid $0.84 for the contract.
The trade has 211 days to play out. With shares around $45, they would need to drop $12.50, or over 27 percent, to move in-the-money.
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Even with the recent volatility in shares that saw the price move as high as $51, the stock is still up 79 percent over the past year. Shares trade as a seeming value play, with the bank trading just over book value and at 13 times forward earnings.
Action to take: In a market pullback, a big drop in bank shares could occur. Bank stocks tend to be vulnerable to above-average drops when the market drops. Investors who are patient can likely end up buying the bank under its book value, and grabbing a higher starting dividend yield than the current one of 1.8 percent.
Traders may like the option as a hedge against a market drop in the coming weeks, given the low price and the amount of time for the option to play out. Traders should look to book mid-to-high double-digit profits on any selloff in shares in the coming weeks.
Disclosure: The author of this article has no position in the company mentioned here, and does not intend to trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.