Wednesday, February 16, 2011

Wells Fargo (WFC) - Vol Explodes, Stock Moves Against Financials' Trend

WFC is trading $33.00, down 2.0% with IV30™ exploding up 17.5%. The LIVEVOL® Pro Summary is below.

Note also that while WFC is down, XLF is up.


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I found WFC using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are below with a snapshot if you want to build it yourself in Livevol Pro.

Custom Scan Details
Stock Price >= 10
Average Option Volume >= 1,200
Days After Earnings >= 5 and <= 60
IV30™ Percent Change >= 10%
IV30™ >= 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The WFC Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 31.76
HV20™: 26.43
HV180™: 31.66

We can see IV30™ popping. Today it has just gone above the HV180™ (long-term realized) and is well higher than the HV20™ (short-term realized).

The Skew Tab snap (below) illustrates the vols by strike by month.

The skew looks pretty normal, with the front month (expiring) downside showing a steep slope -- we'll analyze this as a potential trade.

Finally, the Options Tab is included below.

Possible Trades to Analyze
1. Calendar spread the downside:
Buy the Feb/Mar 33 put spread for $0.74. This sells ~44 vol and purchases ~32 vol. Another way to look at it -- the Mar options have ~34 days to expo while Feb has 3, but the Feb option premium represents nearly 40% of the Mar options.

2. Calendar spread the upside with a twist (and risk):
Sell the Feb 33 calls @ $0.44 (~44 vol).
Buy the Mar 33 calls for $1.19 (~32 vol).
Sell the Mar 34 calls @ $0.70 (~29 vol).
Pay $0.05 and bet that WFC sticks around $33 on Feb expo and try to leg into a Mar 33/34 call spread for just a nickel.
NB: This is naked short the upside for the next 2.5 days.

This is trade analysis, not a recommendation.

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