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Pressing Hard on This Wells Play

This trade is a bit complex, but I really like the risk-reward.
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Sometimes I see earnings charts I like, and sometimes I see earnings charts I really like. I hesitate to use the word "love."

Wells Fargo (WFC) -- Daily

Source: StockCharts.com

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The issue isn't confined to the chart, though. For instance, on this chart of Wells Fargo (WFC), I see a very large wedge formation, with a price and relative-strength index that are the verge of breaking out ahead of the bank's scheduled report Friday morning. This makes me think bullishness, as well as volatility, yet with a bullish slant.

The chart isn't always enough, though. I want to play earnings through options, so pricing must be attractive to create a risk-reward scenario worth trading. I view Wells Fargo as having the potential to actually get above $36 or under $34, yet the options don't seem to be pricing in a much more substantial move than that. This gets me thinking straddles and strangles. But this name welcomes another approach due to its weekly options contracts. The play may be a bit more complex, but it will be a full-size trade into earnings -- which is a bit usual. Still, I really like the risk-reward.

Here is what I am doing. I am going long the Jan. 18 $35 straddles around $1.16, which will put me long 1 call and 1 put at the $35 strike price. Next, I am going to add ratio spreads to both sides of the position. I am going long 1x Jan. 11 $34.5 put and shorting 2x Jan. 11 $34 puts, as well as going long 1x January $35.50 call and short 2x January $36 calls for a cost around $0.03. In the end, I am left with a 1 x 1 x -2 combination, starting from the $35 strike, and with two legs in each direction, $0.50 apart.

If Wells Fargo shares move to $34 or below, or if they reach $36 or above, I should be looking at a value of $1.50 to $1.60 on this position. If the stock just moves to $35.75 or $34.25, then I should still be close to even on the name. My risk here is if Wells only moves 1% or maybe 2%. Given the chart, the recent run-up in financials and the expectations, I just don't see this as likely, so I am willing to press hard on this trade.

At the time of publication, Collins was long WFC straddles and ratio spreads.