Wells Fargo (WFC) broke out past a proper buy point in a new base at 48.23 on Friday and recently was featured as the IBD Stock of the Day. Wells Fargo stock has seen its Relative Strength Rating improve to 92.
The stock is also showing a Composite Rating of 88 and an Earnings Per Share Rating of 64.
The company earned back its spot on IBD Leaderboard as a half-size position as well.
Traders that expect strength in WFC stock to continue could look at a bull put spread option trade.
How To Set Up The Put Spread In Wells Fargo Stock
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put. Selling the Sept. 17-expiring 47.50 put and buying the 42.50 put would create a bull put spread.
This spread was trading for around $1 on Friday. That means a trader selling this spread would receive $100 in option premium and would have a maximum risk of $400. That represents a 25% return on risk between now and Sept. 17 if WFC stock remains above 47.50.
If Wells Fargo stock closes below 42.50 on the expiration date the trade loses the full $400.
The break-even point for the bull put spread is 46.50; you can calculate this as 47.50 less the 1.00 option premium per contract.
Delta Reading For This Wells Fargo Option
This bull put spread trade has a delta of 27. This means it is a similar exposure to owning 27 shares of WFC stock, although this exposure will change over time as the stock price moves. In terms of a stop loss, if the option premium increased in price from $1 to $2.50, I would consider closing early for a loss.
With earnings set for early October, this trade should have no earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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