Repairs on Wells Fargo Look Tough

This is not exactly the way I wanted to begin earnings season, but it is what it is. Repairs on Wells Fargo (WFC) look tough as the trade is down to around $0.72 from $1.20, but here are some of the options to consider since WFC is still trading within the wedge pattern. First, take the loss and move on. In all, this isn't a terrible strategy to consider. Sometimes the first loss is the best loss, but if you are of the belief WFC will move next week, then there are considerations, but they are somewhat limited. I would close all the January 11 positions for next to nothing in order to examine the January 18 $35 straddle. Using a ratio trade here buying 1x more the $35's straddles and selling 2x of the January 18 $35.5 call/$34.5 put for no cost until you have spreads in either direction doesn't work well here. Assuming I purchased 50 of this option play, by doing such a trade for around $0.09 my total cost in the trade could now be $1.29, but my maximum profit is $1.00 (well $0.50, but I now hold twice as many). I'm a guaranteed loser there and if WFC stays at $35 during the week, then I am much worse off.

Another consideration is to move the $35 straddle strikes $0.50 further in the money using a ratio trade. Therefore, I would sell the January 18 $35 calls and buy half as many $34.50 calls. Likewise, I would sell the January 18 $35 puts and buy half as many January 18 $35.5 puts. While this locks in a maximum loss giving my original trade a worst-case value of $0.50 (the spread will be worth at least $1.00, but I have half as many as I did the straddles), I need a big move for this to pay off. WFC would have to see $37 or $33, which feels much less likely....413 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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