If you’ve paid attention to the financial news in the past several months, you can’t help but notice that Bank of America Corp (NYSE:BAC) has become the poster child for the bull rally in the financial sector. But BofA isn’t the only banking concern out there for investors looking to take advantage of rising interest rates from the Federal Reserve. In fact, Wells Fargo & Co (NYSE:WFC) is one such investment opportunity that is often overlooked.
Historically, Wells Fargo stock isn’t known for being volatile enough for short-term traders, let alone options traders. But the stock has seen a recent jump in volatility due to the “Trump Bump” and the Federal Reserve’s promise of higher interest rates. Furthermore, WFC stock should also see a spike in volatility in April as Wells Fargo’s fiscal first-quarter earnings report draws near — providing an opportunity for WFC options traders.
WFC Stock Expectations
Diving into the numbers, Wall Street is expecting Wells Fargo to earn 96 cents per share in the first quarter, with revenue expected to come in at $22.29 billion.
While the company has yet to set an official earnings date, estimates place Wells Fargo’s quarterly report near April 14.
On the sentiment front, Wells Fargo stock hasn’t attracted the same bullish bid as the rest of the financial sector — especially the wealth of optimism surrounding BAC stock. For instance, according to Thomson/First Call data, WFC has earned just 13 buy ratings, compared to 14 holds and six outright sell ratings. Furthermore, the 12-month price target of $58.29 represents a discount to Monday’s close at $58.61.
While this lack of enthusiasm might make some investors nervous, contrarian investors should see the lack of buy ratings as a potential opportunity for the situation to improve.
Click to Enlarge There is also room for improvement on the options front for WFC stock. Currently, the April put/call open interest ratio rests at a bearish reading of 1.36, with puts easily outnumbering calls among options that could be most affected by Wells Fargo’s earnings report. What’s more, an increase in call activity heading into the event could be a bullish signal for Wells Fargo.
Overall, April implieds are pricing in a potential post-earnings move of about 3.7% for WFC stock. This places the upper bound near $60.90, while the lower bound lies near $56.50.
2 Trades for WFC Stock
Call Spread: It’s clear that WFC stock wants to join the rest of the financial sector in rally mode. The only obstacle standing in the way is resistance near $60. If earnings can provide the pop needed to break above $60, Wells Fargo could be in for another up-leg higher. Those looking to bet on a breakout for WFC stock might want to consider an April $60/$62.50 bull call spread.
At last check, this spread was offered at 57 cents, or $57 per pair of contracts. Breakeven lies at $60.57, while a maximum profit of $1.93, or $193 per pair of contracts, is possible if Wells Fargo closes at or above $62.50 when April options expire.
Put Sell: As I mentioned above, WFC is not typically a volatile stock. So if betting on a big post-earnings rally is a bit too risky, an April $55 put sell could be a viable alternative.
At last check, this option was bid at 62 cents, or $62 per contract. As usual with a put sell, you keep the premium as long as WFC stock closes above $55 when April options expire. On the downside though, if Wells Fargo trades below $55 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $55 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
