WFC Analysis

The bank Wells Fargo & Co. (WFC), headquartered in San Francisco, California, broke above its 20-day price channel on Tuesday. The stock has low historical odds of producing valid bull signals. In such cases, the stock is a candidate for a direction neutral trade and confirms the signal by reversing back into the price channel.

Although WFC has pulled back from Tuesday's bull-signal high, it remains above the price channel boundary. I shall proceed with the analysis, keeping in mind that it is a wannabe confirmation rather than the real deal.

I shall use the MAY5 Weeklys series of options, which trades for the last time nine days hence, on May 29.

[WFC in Wikipedia]

WFC

WFC has completed six bull signals in the past year. Two were successful, with an average yield of 1.7% over 46 days. Four were unsuccessful, with an average loss of 2.8% over 2 days.

Ranges

Click on chart to enlarge.

WFC at 10:55 a.m. New York time, 30 days hourly bars

Implied volatility stands at 15.7%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. WFC’s volatility stands in the 7th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	57.66	59.04	56.70
Lower	54.90	53.52	54.45
Gain/loss	2.5%	4.9%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade


Iron condor short the $57 calls and long the $58 calls,
short the $55.50 puts and long the $54.50 puts
sold for a credit and expiring May 30
Probability of expiring out-of-the-money

MAY5	Strike	OTM
Upper	57	76.5%
Lower	55.5	73.3%

The optimal trade construction in terms of probability of expiring out of the money for maximum profit produces a risk/reward ratio of 3.3:1, which is quite high by my standards.

The optimal construction for the risk/reward ratio looks like this:

Iron condor short the $56.5 calls and long the $57.5 calls,
short the $56 puts and long the $55 puts
sold for a credit and expiring May 30
Probability of expiring out-of-the-money

MAY5	Strike	OTM
Upper	56.5	59.7%
Lower	56	59.4%

The risk/reward ratio is excellent at 1:1, but the profit zone is only 50 cents wide, narrow than that 66-cent average true range. Not even I'm that optimistic.

Decision for My Account

I'm passing on the trade because I can't get a sufficiently narrow risk/reward ratio with an acceptably wide profit zone. I plan no further analysis today of WFC.

-- Tim Bovee, Portland, Oregon, May 20, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.