Shares of bank Wells Fargo (WFC) have been trending sideways for the past several months, with a few mild drops followed by a gradual recovery. One trader sees the possibility for a big drop in the next two years.
That’s based on the January 2024 $27.50 puts. With 760 days on the clock until expiration, 5,001 contracts traded against a prior open interest of 138, for a 36-fold jump in volume. The buyer of the calls paid $1.51 to make the trade.
Shares last traded near $48. So in order for these options to move in-the-money, shares of the bank would need to drop by 43 percent.
That would indicate a flip from the bank’s 62 percent return over the past year. The bank has been doing well operationally, with shares trading at 14 times forward earnings and earnings up 59 percent year-over-year.
The most likely culprit for a big decline would be on some unexpected economic fear. That’s certainly possible over any two-year period, especially with the Fed looking to raise interest rates later next year.
Action to take: Among the big banks, Wells trades at a discount due to its ongoing management problems. Traders looking to go long can look elsewhere in the big bank space.
For traders, the put options look like a very inexpensive bet with big upside potential on any market disaster in the next two years. Under the right circumstances, the trade could return triple-digit gains. However, traders might want to wait until after the holiday season.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.