Traders Give Wells Fargo a Wide Berth Ahead of Earnings

07/12/2017 2:55 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Given the choppy price action in WFC, it’s hard to blame traders for avoiding the stock ahead of earnings. One intrepid speculator is betting on Wells Fargo to hold ground in the mid-50s after earnings, says Elizabeth Harrow, at Schaeffer’s Investment Research.

Banking giant Wells Fargo (WFC) is set to report second-quarter earnings before the market opens this Friday, July 14. A few days out from the event--which coincides with quarterly releases from JPMorgan Chase (JPM) and Citigroup (C), and marks the unofficial start of the earnings onslaught to come-analysts are looking for WFC to report a profit of $1.01 per share on revenue of $22.47 billion, according to Thomson Reuters.

Generally speaking, analysts have fairly tepid expectations for Wells Fargo. No fewer than 17 brokerage firms maintain a Hold or Sell rating on the stock, compared to 12 Buy or better recommendations. And the average 12-month price target currently stands at $58.19--only about 5% north of the equity's current price, and below WFC’s March 1 record high of $59.99.

The lukewarm attitude seems fitting, given WFC’s hot-and-cold performance on the charts in 2017. During the two-month interval between that March 1 peak and the stock’s May 31 year-to-date low of $50.83, the shares endured a 15% correction.

And while a June 29 bull gap propelled the stock above its 80-day moving average, WFC is struggling to maintain a foothold above its 160-day trendline. Just below that, right around $54, is a trendline connecting a series of lower highs from late March through late June, which WFC successfully took out with the aforementioned bull gap.

The mid-50s is home not only to the stock’s 160-day moving average and the descending trendline, but it’s also the site of the WFC year-to-date breakeven level of $55.11. Options traders seem well aware of the significance of this price point; the July 55 call is the most popular front-month strike for WFC, with nearly 33,000 contracts in open interest.

That said, options open interest is relatively light on WFC right now. Trade-Alert tallies only 1.19 million open calls and puts on the stock, which registers in the low 35th percentile of its annual range. By contrast, JPM’s pre-earnings call open interest of 708,380 contracts arrives in the 82nd annual percentile.

(For what it’s worth, WFC short sellers are also thin on the ground. The current accumulation of 28.36 million shorted shares is the lowest reported since mid-February.)

Among those who are speculating on the mortgage scandal-stricken finance stock, they’re anticipating a bigger-than-usual move out of WFC following the Friday report. The implied earnings move is 3%, compared to the average 1.6% price swing over the last eight quarters. Over this two-year stretch, WFC shares have logged a post-earnings daily move exceeding 3% on only two occasions--in January 2016 and April 2017.

Given the choppy price action in WFC, it’s hard to blame traders for avoiding the stock ahead of earnings. However, one intrepid speculator is betting on Wells Fargo to hold its ground in the mid-50s after earnings, with a multi-exchange sweep of 3,527 contracts sold to open around midday Tuesday at the stock’s out-of-the-money July 52.50 put strike.

View Schaeffer's Investment Research for stock and options ideas, options education, and market commentary here…

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