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This morning I am recommending a bearish trade on Wells Fargo & Company (NYSE:WFC).
The Fed is still dovish, which looks good for the broader market but bad for banks. Higher interest rates generally benefit the financial sector, so I have been avoiding any bullish plays in that area.
At the end of March, WFC CEO Tim Sloan resigned, forcing the company to start looking for a replacement. With an earnings report approaching on Friday, April 12, I think the stock is particularly vulnerable.
Tim Sloan’s Resignation
Tim Sloan took over as CEO in October 2016 when the former CEO resigned over a fake accounts scandal. Sloan was supposed to improve the company’s reputation, but unfortunately, additional problems came to light in their auto lending, mortgage, foreign exchange, and wholesale unit divisions.
As scandals mounted, more and more critics pressured Sloan to leave, and now his resignation has put WFC in a difficult position. Warren Buffet, the largest shareholding in WFC, is actually calling for a replacement from outside Wall Street.
Though Sloan’s resignation may ultimately help WFC move beyond its problems, I don’t think banks are operating in a good market environment. WFC is still dealing with the consequences of its scandals, and if earnings don’t go well on Friday, it could push the stock lower.
A Long Downward Trend
WFC has been trending downward since early 2018, and I think it could head even lower. The stock hit its 52-week low in December, when the market sold off, and it never retested that low. It recovered through the beginning of the year, but the stock is making lower highs. Now it looks like there is new resistance at the $50 level.
Daily Chart of Wells Fargo & Company (WFC) — Chart Source: TradingView
Slowing international growth has helped keep the U.S. dollar strong, and I think that will drag on the earnings of multinational companies like WFC. When the dollar is strong compared to foreign currencies, companies bringing their profits back to the U.S. are not able to convert them into as many dollars.
The bar has been set low for the coming earnings season, but WFC is in an unusual situation, and that’s one reason I think it will struggle to meet expectations. For that reason, I am recommending a put debit spread on WFC.
Using a spread order, buy to open the WFC May 17th $47.50 put and sell to open the WFC May 17th $45 put for a net debit of about $0.62.
Note: There are several May expirations available for WFC options. Be sure you are opening the monthly options that expire on Friday, May 17, 2019.
About Put Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
