WFC Analysis

Wells Fargo & Co. (WFC)

Update 10/13/2017: WFC gapped to the downside after earnings were published. It broke past the breakeven point, and I exited for a a loss a week before the options expire, with shares down $1.86 from my entry point and the contracts costing $1.82 each to exit, or 56 cents net.debit.

The company showed a significant downside earnings surprise, report $0.84 per share compared to the consensus forecast of $1.05. The Zacks earnings surprise predictor had forecast a 0.20 upside earnings surprise.

The actual move at the time I exited was wider than the expected move and also larger than the maximum of the last four post-earnings trading days.

Shares declined by 3.4% over my one-day holding period, for a -1,231% annual rate. The options position produced a 30.8% loss for a -11,231% annual rate.

WFC publishes earnings on Friday before the opening bell.

I shall use options that trade for the last time eight days hence, on Oct. 20.

Implied volatility stands at 21%, which is 2.2 times the VIX, a measure of the volatility of the S&P 500 index.

WFC’s IV stands in the 41st percentile of its annual range and the 83rd percentile of its most recent broad movement.

The price used for analysis was $55.35.

Premium: $1.26 Expire OTM
WFC-iron fly Strike Odds Delta
Calls 58.00 91.2% 9
Break-even 56.76
Short 55.50 53.3% 48
Short 55.50 46.6% 52
Break-even 54.26
Long 53.00 87.1% 12

The premium is 50.4% of the width of the position’s wings.

The risk/reward ratio is 1:1.

The zone of profit in the proposed trade covers a $1.25 move either way. The biggest immediate move after each of the past four earnings announcements was $1.77, and the average was $0.81. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.81.

The expected move covering 85% of occurrences is $1.25, identical to the profit zone.

The bid/ask spread is 0.8%.

Decision for My Account

I have entered a position on WFC as described above. The stock at the time of entry was priced at $55.32.

By Tim Bovee, Portland, Oregon, October 12, 2017


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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