Thursday, January 14, 2016

WFC Analysis

The financial company Wells Fargo & Co. (WFC), headquartered in San Francisco, California, publishes earnings on Friday before the opening bell.

[WFC in Wikipedia]


I shall use the FEB series of options, which trades for the last time 36 days hence, on Feb. 20.


Implied volatility stands at 34%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. WFC’s volatility stands in the 91st percentile of its most recent range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

WFC has been in a downtrend since Dec. 17. It briefly bounced back to the upside in a countertrend correction of a few days but then fell back to its low point of the trend. The stock price has fallen as often as it as risen after earnings announcements during the past year.

Brokerages covering WFC give it a 22% enthusiasm rating. Of 18 analysts covering the stock, half are giving it a strong buy recommendation.

The options grid makes it difficult to put together a reasonable position, with the nearest out-of-the-money call  strike having a 72% chance of expiring for maximum profit, and the next step out having a 90% chance. That's not much granularity.

Going by the book, a direction neutral iron condor would look like this:

Iron condor, short the $55 calls and long the $60 calls,
short the $45 puts and long the $40 puts,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money


Let's look at the numbers. The stock at the time of analysis was $50.24.

The premium is $0.40, which is 8% of the width of the position’s wings. The risk/reward ratio is 11.5:1.

Obviously, given my guidelines that prefer a premium that is 30% of the wings with a risk/reward ratio below 4:1, the proposed iron condor is totally unacceptable.

The zone of profit, however, is reasonable. The proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $4.65, and the average was $2.08. The central tendency, with the outliers removed, was $1.65.

Is a directional play possible? I give charts greater credence than analyst recommendations, so I'll go for the bear play.

Bear call spread, short the $52.50 calls and long the $55 calls,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money


The premium is $0.50, which is 20% of the width of the position’s wings.

The risk/reward ratio is 4:1.

The strike price is $2.26 above the stock price at the time of analysis, providing profit greater than the average post-earnings move and greater than the central tendency, but leaving a large portion of the maximum move uncovered.

Using my $500 hypothetical trade, I would open with three contracts, which provides maximum profit of $150. My rule is to exit when I've attained half of the potential profit, and I want that level to be $100 or greater. The bear call spread provides a $75 hypothetical exit, too small to be worthwhile for an earnings play.

Decision for My Account

I'm passing on the this trade. No deal.

-- Tim Bovee, Portland, Oregon, Jan. 14, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


Two social media feeds provide notification whenever something new is posted.

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.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at

No comments:

Post a Comment