Wells Fargo (NYSE:WFC) is perhaps my least favorite bank in the financial sector. My lack of affection isn’t due to any personal animus, mind you. It arises from a stock chart that signals the Street’s sentiment is hovering between indifference and bearish.
At least that’s been the tale of 2020. And yet, buyers have made advances this month and it warrants further investigation.
We’ll dive into the recovery details in a moment, but here’s the high level overview. Prices have levitated 20% off of last month’s 52-week low. It’s the biggest bounce we’ve seen since the May-June surge and points toward what could be the beginning of a more substantial shift in momentum. Buying dips could be the new selling rips.
WFC Stock Is Looking Up
In and of itself, a 20% ramp doesn’t mean anything. After all, it could have transpired from deeply oversold conditions and simply set up a juicy sell-the-rally setup in a downtrend. Fortunately for Wells Fargo, this rebound has grown into something more.
Last Monday’s moonshot saw volume zip past 100 million shares. The participation groundswell propelled prices above the 20-day and 50-day moving averages as well as an old resistance pivot. In doing so, it officially turned the short-term trend higher. We’ve seen nothing but constructive price action since. Sure, a few down days have cropped up, but they’ve lacked conviction. Volume remained minimal and the price drops were tiny.
Unfortunately, there’s still much work to be done before the nascent uptrend heats up. Multiple rallies this year have stopped dead near $26. It looms $1 away, threatening to end the current turnaround.
The other dynamic fueling my doubts is the nasty relative weakness. Even after the past three week rise, prices are still where they were at the depths of the March crash. The past eight months of zig-zagging has led shareholders on a circuitous route to nowhere.
Meanwhile, the Financial Sector (NYSEARCA:XLF) is up 56% from its bottom. That’s a monumental difference illustrating just how much Wells Fargo has lagged. In the wake of the election, financial stocks have been a runaway winner.
The recent vaccine news has investors rushing back into banks and it’s a theme that should continue. But unless you think Wells Fargo is going to suddenly switch from a laggard to a leader, then it’s hard to justify using it as your vehicle for gaming the bank comeback.
But if you find the suggestion to pass on Wells Fargo in search of more bullish, arguably easier trades elsewhere in the sector dissatisfying, worry not. I still have a trade idea if you’re intent on betting the fledgling recovery continues.
Play the Probabilities with Short Puts
Purchasing shares outright is a tough pitch because of the significant resistance overhead. Instead, I suggest using derivatives to enhance your probability. We can build a trade that profits whether prices rise, stagnate, or even fall slightly from their current level. My preferred strategy here is selling naked puts.
The Trade: Sell the December $22.50 put for around 32 cents.
Consider it a wager that Wells Fargo remains above $22.50 for the next month. If it does, you will pocket $32 per contract. It may not sound like a substantial pay-day, but it does translate into an 11% return on the initial collateral required when you enter the trade. That’s an acceptable one-month return by naked put standards.
If the stock slips too far and the put moves in-the-money, you can either exit the trade or allow assignment and buy shares at a basis of $22.18 at expiration.
On the date of publication, Tyler Craig held a LONG position in XLF.
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