GO
Loading...

The bank that options traders are betting against

Friday, 11 Oct 2013 | 2:00 PM ET
Patrick T. Fallon | Bloomberg | Getty Images

JPMorgan and Wells Fargo kicked off the bank earnings season with mixed results Friday. JPM reported its first quarterly loss under CEO Jamie Dimon, while Wells reported earnings per share of 99 cents, beating expectations 97 cents.

(Read more: JPMorgan sees some ugly firsts with earnings)

Well Fargo's results marked the 10th straight quarter of record profits, but the stock was down Friday morning, and one trader is loading up on puts. With shares at $40.66, we saw someone initiate a bearish position by buying 4,000 October 40.50-strike puts on Wells Fargo for 45 cents each. This is a bearish bet that breaks even if the stock is below $40.05 by expiration next Friday.

Wells' profits may have been strong, but bears are selling its shares because of its exposure to rising interest rates. Wells is the nation's largest home lender, which means that the bank felt the effects of lower loan and refinancing volume in the third quarter. Given that interest rates spiked, it should not be shocking that refinancings are down, but bank shares could nonetheless get hit short term as the market prices in this reality.


Bove: Don't worry about Wells Fargo's mortgage problems
Analyst Dick Bove tells Scott Wapner that the bank is highly diversified, so investors shouldn't be too concerned about its refinancing issues.

Still, I would not make bets on the short side, and I believe that Friday morning's dip in Wells Fargo presented a good buying opportunity for a long-term investor. This week's announcement that Janet Yellen will head up the Fed (if confirmed by Congress) means that monetary policy should remain accommodative for some time. That should slow the rise in interest rates and give homebuyers and owners another chance to take out a mortgage or refinance in 2014, which will help Wells Fargo.

(Read more: Don't fret over Wells Fargo mortgage drop: Bove)

Wells Fargo is a large, diversified bank with solid management and a good track record of conservative, steady growth that has led Warren Buffett to take a large stake in the company. If you invest in this name, you will need to be prepared for volatility whenever fears that interest rates will rise crop up. Therefore, I would keep some protection on in the form of out-of-the-money put spreads, which should smooth out the peaks and troughs over the longer term.


Disclosures: Stutland is long shares of JPMorgan.

Brian Stutland is managing member of Stutland Equities and a contributor to CNBC's "Options Action." Follow him on Twitter: @BrianStutland

  Price   Change %Change
WFC
---
JPM
---

Contact

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Latest Video

Options Action Daily Reports

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.

You Make the Call

  • Mike Khouw, Options Action trader, shares his view on News Corp stock on the heels of testimony from Rupert Murdoch before British Parliament.

  • Do you have a question for the Options Action team? Options Action selects a viewer's question and gives the answer on the show's Make The Call Web Extra video.