Wells Fargo Options Point to Lower Prices

Chris McKhann, an analyst at OptionMonster.

Wells Fargo(WFC) fell as much as 4.5% today, and options suggest more downside.

In a complicated trade, one large institutional trader bet that the hard-hit bank stock would extend its decline, in the trader's case to $10 by July. WFC started today at $16.85 and finished at $15.95.

The eye-catching position was a "ratio spread," a sophisticated strategy that has recently been used on a large scale in names like the MSCI Brazil Index ETF(EWZ) and the VIX. The WFC trade involved buying 25,000 of the July 15 puts for $3.40, followed within seconds by the selling of 50,000 of the July 10 puts for $1.45.

The cost of the trade was $0.50, which is the risk if the stock stays above $15. The maximum profit comes if the stock is at $10, and then there is risk below $4.50.

This trade, which is similar to the so-called butterfly trade as it has three of the same four positions, is usually done on the put side, where it has limited risk with an extra short put. Doing this in calls leaves the trader short a naked call, which has unlimited risk.

WFC has been unable for the past two weeks to break up through resistance at $17.50. It remains 100% above the low that was set on March 5 at $7.80, but has trended down from the highs near $40 back in September.

The writer has no positions in the securities.