Put volume surged in Wells Fargo (WFC) Tuesday. Shares fell in morning trading and hit a morning low of $22.61 before rallying in afternoon action and closing up $1.03 to $23.41. In options trading, 223,000 puts and 53,000 calls traded on the bank. By way of comparison, typical daily volume (puts and calls) is about 76,000 contracts for Wells Fargo.
The biggest trade in WFC Tuesday was a January 12.5/22.5 put spread, which traded at $2.31, 19,000X. The strategist bought the January 22.5s at $2.77 and sold the 12.5s at $1.25, creating a bearish trade with a max payout if Wells Fargo falls to $12.50, or about 45%, through January 2012 expiration (107 days).
The next biggest trade was a buyer of 9,500 October 18 puts on the bank at $0.47. Data indicate a customer bought-to-open a new position. The third largest trade in WFC Tuesday was a January 12.5/20 put spread at $1.51. Open interest data suggest that substantial put positions were being opened in WFC yesterday. Total open interest in WFC puts increased by 123,000 contracts. By way of comparison, open interest in the calls increased by about 11,000 contracts.
I'm not putting a trade on in WFC yet, but putting it on my watch list for bearish trading ideas. Yesterday's options order flow suggests that some "smart money" players are concerned about a substantial move lower in shares in the weeks ahead. It's possibly a play on earnings -- which are due the morning of October 17 and therefore before the October expiration. Or, it's possibly a play on problems in the banking world and broader weakness in the financials. For whatever, the stock dipped to within three pennies of its 52-week low of $22.58 yesterday. If that level fails to hold, the bearish trend is still intact and that would motivate me to follow the flow -- initiate bearish put spreads on WFC.
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