[Options] Wishing Wells

Sean McLaughlin
December 20, 2023

It was remarked during our Analyst meeting this morning that "bullish Wells Fargo" is a phrase that hasn't been uttered within our digital walls in a long, long time.

But we're looking to get more exposure to the banking sector, and $WFC is consolidating nicely after a fresh breakout last week. With all-time highs within bull market distance, we feel like we can get aggressive with this name for a run.

Implied volatility in $WFC call options is pretty tame here, so that affords us the luxury of going out six months to play the June options which will give us plenty of time to see if $WFC has the stuff.

Here's a chart of $WFC to set the stage:

Meanwhile, in a recent Hall of Famers report, the team had this to say about the setup:

Wells Fargo & Co is trading at fresh 52-week highs after recently reclaiming a critical level of interest on the heels of a multi-year base breakout. If these new highs stick, the path of least resistance for WFC is higher, and we want to be long against the 49 level.

On a relative basis, WFC is looking to emerge higher from a 5-year downtrend line versus the broader market. With the absolute price chart breaking out, we expect the stock to start outperforming the overall market over longer timeframes.

If it’s above 49, we want to own WFC with a target of 66 over the coming 3-6 months.

$WFC is currently trading north of $50 per share and it feels like the stars are aligning here. Let's go!

Here's the Play:

I like buying $WFC June 55 calls for under $2.00 per contract. This premium I pay today is the most I can lose in this trade. However, I will close the position to prevent any further losses under the two following conditions:

  1. If $WFC sees a closing price below $48 at any time during my hold. Or,
  2. The calls lose 50% of their value.

If neither situation materializes, then that means $WFC is trending in the direction we need it to, and I'll be looking to trim a little off if/when the stock trades to $65. This level is just shy of all-time highs set in 2018 and would be a logical spot for a pause. I'll sell enough of my position to pay me back my original investment, and I'll hold the rest to see what else $WFC can do for us.

If we're still in the position when we get to June 1st (expiration month) and the calls are in-the-money (meaning $WFC is trading above our $55 strike price), then I'll begin to aggressively trail a mental stop on the trade at a 3-5 day low and hold on for as long as I can.

If you have any questions on this trade, please send them here.

If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.

~ @OptionsSean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7910.

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