Tuesday, May 17, 2011

Trade of the Day: Wells Fargo January 2013 $35/$40 ratio call spread

The Trade
A trader put on the January 2013 $35/$40 ratio call spread at 7,635x14,964 at $0.08 or a $28,950 credit.

As you can see from the graph above, the spread profits the most from an increase in the underlying stock before January 2013 expiration. The max profit occurs at an underlying stock price of $40 at expiration. Wells Fargo gained 3.2% today and closed trading at $28.75. The spread has unlimited risk to the upside because of being short more calls than long.

The chart shown above is the Wells Fargo daily stock chart. You can see that the current range shows lots of congestion. The bullish trader could possibly view this as a support level.

The trader must like the idea of having this trade done for a credit. Therefore, if the underlying stock remains unchanged by expiration, the trader profits. Also, by using the 2013 options, the trader has more flexibility to alter the position. Also, the ratio call spread could be a a bet that interest rates will increase before January 2013 expiration.

WFC traded 103,762 contracts today compared to average daily volume of 68,201. It's interesting to note that a similar bullish ratio call spread went off in BBT today. The banks were strong on the session. BAC, JPM, C, USB, GS, and MS were all up today.

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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