Shares of megabank Wells Fargo Company (WFC) have lost over one quarter of their value since February. One trader sees room for a continued downtrend in the coming weeks.
That’s based on the June 10th $44 puts. With 31 days until expiration, 11,374 contracts traded compared to a prior open interest of 143, for an 80-fold increase in volume on the trade. The buyer of the puts paid $1.87 to bet on a further drop in shares.
Shares recently traded around $44.50, so they’d need to fall just over 11 percent in the next month for the put option to move in-the-money.
The bank stock is under pressure due to rising interest rate fears and concerns that the economy may face a harder landing than previously expected.
Action to take: Wells is the cheapest of the megabanks at under 10 times forward earnings. However, the company’s reputation is still recovering, and the bank’s relatively high exposure to mortgages could lead to trouble if credit in the housing market freezes up.
That said, shares could be worth a buy when the market starts to bottom out, and shares currently yield 2.2 percent with room to grow.
For traders, the options are very short term, and require a relatively sizeable drop in order to play out. Traders should consider buying on a strong day for the market, and look to cash out on the market’s next down day to profit on the downside from the current market volatility.
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.