Traders bet on relief rally after earnings miss.
Shares of Wells Fargo (WFC) took a hit after reporting earnings earlier this week, and at least one trader is betting that some of that recent loss will be unwound in the coming days.
That’s based on the 20-fold rise in volume on the February 7th, 2020 $49 calls on the company.
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With 21 days until expiration, and shares right around $49, these options are at-the-money, and could start moving higher dollar-for-dollar with a recovery in shares.
Action to take: We like the company’s prospects as a rebound play. As we looked at in further detail elsewhere, the company’s earnings miss were driven in part by one-time events that are unlikely to occur in the future. Among the mega-banks, we see a big opportunity here.
In addition to shares trading around 10 times earnings here, shareholders should consider buying here, to lock in a dividend yield just north of 4.1 percent.
Speculators may like to buy the February call, with an eye towards 20-30 percent profits in the coming days should shares follow through with a post-decline recovery higher.
Given how the option is right at-the-money, however, it would be prudent to take any profits quickly, rather than try to hold out and fight against the time premium in the option over the next three weeks.