Call Sellers Hitch on to Wells Fargo’s (WFC) Wagon?

01/12/2010 12:01 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Wells Fargo (NYSE: WFC) wasn’t on the newswires on Friday, but the onset of earnings season may have had an investor looking to protect an existing investment in the shares.

There was some unusual interest in the WFC April series on Friday, with nearly 14,000 contracts trading on the April 33 call. This compares to open interest of fewer than 5,914 contracts, suggesting that the majority of this volume traded to open. One block of 12,660 contracts changed hands at 2:30 pm ET, hitting the tape at 55 cents per contract. The call lost more value on the day than its delta would indicate, however, suggesting that this block may have been sold to open.

It is possible that these upside calls were sold as part of a covered call strategy, where the investor holds shares of WFC stock, but wants a hedge in place as earnings season approaches (fellow financial bellwether JP Morgan reports earnings on Friday and Wells reports before the open on January 20). Gains are capped at the 33 strike, but the 55-cent premium collected provides a bit of relief against any downside in the stock position.

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Even with earnings around the bend, volatility came in on WFC on Friday, as the front-month, at-the-money straddle dropped in price to $1.09 from $1.21 on Thursday as the non-farm payrolls report was out of the way.

The February at-the-money straddle, however (which represents the earnings month), is priced at $2.87 (as of Friday’s close February expiration in roughly six weeks.

By Beth Gaston Moon, contributor,

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