Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Wells Fargo & Co. (WFC). So this week we highlight one interesting put contract, and one interesting call contract, from the January 2016 expiration for WFC. The put contract our YieldBoost algorithm identified as particularly interesting, is at the $28 strike, which has a bid at the time of this writing of 55 cents. Collecting that bid as the premium represents a 2% return against the $28 commitment, or a 1.1% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to WFC's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. So unless Wells Fargo & Co. sees its shares decline 43.5% and the contract is exercised (resulting in a cost basis of $27.45 per share before broker commissions, subtracting the 55 cents from $28), the only upside to the put seller is from collecting that premium for the 1.1% annualized rate of return.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the January 2016 expiration, for shareholders of Wells Fargo & Co. (WFC) looking to boost their income beyond the stock's 2.4% annualized dividend yield. Selling the covered call at the $60 strike and collecting the premium based on the $1.29 bid, annualizes to an additional 1.4% rate of return against the current stock price (this is what we at Stock Options Channel refer to as the YieldBoost), for a total of 3.9% annualized rate in the scenario where the stock is not called away. Any upside above $60 would be lost if the stock rises there and is called away, but WFC shares would have to advance 21% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 23.6% return from this trading level, in addition to any dividends collected before the stock was called.The chart below shows the trailing twelve month trading history for Wells Fargo & Co., highlighting in green where the $28 strike is located relative to that history, and highlighting the $60 strike in red:
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts