Complex outcomes in Wells Fargo trade

By David Russell,

Shutterstock photo

Wells Fargo has bounced after a big drop, and one investor is positioning for new lows.

optionMONSTER's Depth Charge tracking system detected the purchase of about 10,000 September 24 puts for $0.87 and the sale of an equal number of October 23 puts for $1.08. Volume was above open interest in both strikes.

Known as a bearish diagonal spread, the trade has a complex set of outcomes. It generated a credit of $0.21 off the bat and stands to earn an additional $1 if WFC falls to $23 by September expiration and holds that level. If, however, it falls below $23, the investor will have to buy shares at that price.

The good news is that the trader will have already collected $1 from the September puts, so the entry price would really be $22.

Overall the trade was probably the work of a long-term investor in the San Francisco-based lender. The diagonal spread protects against limited drop in the near term while setting them up to buy more shares at lower prices later in the year.

WFC is up 2.2 percent to $25.10 in morning trading. The stock dropped 10 percent in the preceding month.

There is also a calendar spread on the name, with October 25 puts sold for $1.69 and the September 25s purchased for $1.16. That strategy will profit from the stock holding its ground while creating the possibility of getting long at lower prices. (See our Education section)

Overall option volume is already above average in the heavily traded name, with puts outnumbering calls by 11 to 1.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: WFC

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