18 July 2022

Dear Subscriber

Don’t Bank on It

Wells Fargo (WFC) posted earnings on Friday morning that were underwhelming. Profits declined 48% from a year earlier, while revenue and earnings both fell short of expectations. Yet the stock soared 8% before closing 6.2% higher. Why the jump on seemingly bad news? It’s anyone’s guess, though it’s typical to parse the data to spin a bullish story. For WFC, it was strong net interest income. Whatever.

Oddly, there was no analyst activity following the report. No upgrades or downgrades. No target price changes. WFC remains a solid buy among the 30 or so covering analysts, while the target price average is $53.36, 30% above Friday’s close. I guess analysts don’t like to criticize their peers.

Analysts haven’t been getting a whole lot right with WFC this year. Despite the glowing predictions, the stock is down more than 30% from a February high. And Friday’s rally was soundly rejected by the 50-day moving average, which marked tops in March and June. In fact, the trendline hasn’t allowed a daily close above it since late February.

Parse the data all you want. WFC came up short on the big numbers. Consider this a “fade the rally” trade that is banking on WFC’s downtrend continuing. We are using a call credit spread with the short call strike (red line) sitting above the 50-day moving average (blue line).

If you agree that the 50-day moving average will continue guiding WFC lower, consider the following trade that relies on the stock staying below $43 through expiration in six weeks:

Buy to Open the WFC 26Aug 46 call (WFC220826C46)
Sell to Open the WFC 26Aug 43 call (WFC220826C43) for a credit of $0.70 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $41.13 close. Unless WFC drops quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $68.70. This trade reduces your buying power by $300, making your net investment $231.30 per spread ($300 - $68.70). If WFC closes below $43 on August 26, both options will expire worthless and your return on the spread would be 30% ($68.70/$231.30). 

Any questions?  Email Terry@terrystips.com

Did you know that the actual 10K Strategy portfolios conducted at Terry's Tips averaged gains of over 100% in 2017, 2019, and 2020?  The 10K Strategy consists of calendar and diagonal spreads which benefit from the faster decay rates of the short-term puts and calls which are sold (using longer-term options as collateral). You can learn all the details on how to carry out this strategy on your own by subscribing here. Select either Monthly or Annual, click on Sign Up Now and sue the Coupon code D21M for our monthly service for only $98,or D21Y to get a full year of our service for $980 rather than our regular price of $1970, then select Apply Coupon.  Why wait any longer to make this important investment in yourself?

I look forward to having you on board, and to prospering with you.

Terry

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Happy trading,

Terry