Options for stock investors. A better way to trade.

New Trade Alert April 13th – Wells Fargo

New Trade Alert for (WFC)

Wells Fargo Buy June 2018 $45 Call @$9.00 or less

YES JUNE 2018 is only $75 more than January for an extra five months of time.

 


Risk Rating: 3     (1 = lowest   5 = highest)

Above Break Even Probability: 50%

Max Loss Probability: 23%


 

Spring Bank Break 

 

Banks boomed after the election only to recede in recent weeks.  The one year gains in the XLF Financial ETF from $18 to $23 total 25% even after the pull back into the sideways $23 to $24 range from December and January.

 

 

Wells Fargo has been in the news for all the wrong reasons, though Warren Buffet remains bullish for the LONG TERM in this particular bank.

 

 

WFC is down 5% YTD compared to the XLF unchanged 2017 action.

 

The stock track from $44 to $60 has the midpoint pivot RIGHT HERE at $52.  WATCH $52 on a monthly basis to start.

 

The earnings report today disclosed a quarterly PROFIT of $4 Billion…in other words banking money…

 

Wells Fargo has a public relations problem that time can solve making massive amounts of money in the mean time.

 

A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid.  An option instead of buying the shares also has greater staying power for long term trend development.

 

The June 2018 option has ONE YEAR AND TWO MONTHS for Bullish development.

 

An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.

 

The Options Way: Unlimited Upside Potential with Limited Risk.

A Wells Fargo long call option can provide the staying power until sentiment changes.  More importantly, the maximum risk is the premium paid.

 

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.  

There are two rules options traders need to follow to be successful.

Rule One:  Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.   It is also important to buy options that payoff from only a modest price move.

 

There is no need to ONLY make money on the all but infrequent long shot price explosions.

 

Good Options can profit from only modest directional moves.

Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

 

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.  
 
With WFC at $52, an In The Money $45.00 strike option currently has $7.00 in real or intrinsic value.  The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop.  Time is an investor’s greatest asset when you have completely limited the exposure risks. 

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

 

 

 

Trade Setup: I recommend the WFC June 2018 $45 Call at $9.00 or less. A close in the stock below $47 on a weekly basis or the loss of half of the option premium would trigger an exit.

 

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

 

The option also behaves much like the underlying stock with a much less money tied up in the investment.  The Delta on the $45 strike call is 80%.

 

The JUNE 2018 option has A YEAR AND TWO MONTHS for bullish development. This option is like being long the stock from $45 with completely limited risk. 

 

The 52 week WFC low is at $43.50 in October.

 

 

The maximum loss is limited to the $900 or less paid per option contract, with a stop at half of the premium paid.  Essentially risking $450.

 

The upside, on the other hand, is unlimited.

The WFC trade break even is $54.00 or less at expiration ($45 strike plus $9.00 or less option premium).

 

The five month $50ish to $60 range targets $70 on an eventual upside breakout.

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