The bank that options traders are betting against
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.
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.