WFC Earnings: Iron Condor Could See a 49% Return

Wells Fargo (WFC) is due to report earnings before the market open on October 11th. The Barchart Technical Opinion rating is a 72% Sell with a Strongest short term outlook on maintaining the current direction.

WFC rates as a Strong Buy according to 13 analysts with 12 Hold rating. 

Implied volatility is 31.47% which gives WFC an IV Percentile of 94% and an IV Rank of 69.84%.

Wells Fargo & Company is one of the largest financial services companies in the U.S.

The company provides banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance through more than 4,700 retail bank branches, broad automated telling machines (ATMs) network, the Internet and other distribution channels globally.

It has 4 segments. Consumer Banking and Lending offers products and services like checking and savings accounts, credit and debit cards, as well as home, auto, personal and small business lending to consumers and small businesses.

Commercial Banking provides banking and credit products across industries, and treasury management.

Corporate and Investment Banking delivers services related to capital markets, banking and financial products.

Wealth and Investment Management provides personalized wealth management, brokerage, financial planning, lending, private banking, trust and fiduciary products and services.

Wells Fargo Earnings Iron Condor

Today, we’re going to look at an iron condor trade placed over earnings. These types of trades can be high risk, so make sure you understand how they work before attempting something like this.

An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Trade Setup

As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

First, we take the bull put spread. Using the October 13th expiry, we could sell the $53 put and buy the $51 put. That spread could be sold yesterday for around $0.33.

Then the bear call spread, which could be placed by selling the $58 call and buying the $60 call. This spread could be sold yesterday for around $0.33.

In total, the iron condor will generate around $0.66 per contract or $66 of premium.

The profit zone ranges between $50.34 and $58.66. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $2 wide, the maximum risk in the trade is 2 – 0.66 x 100 = $134.

Therefore, if we take the premium ($66) divided by the maximum risk ($136), this iron condor trade has the potential to return 49.25%.

If price action stabilizes, then iron condors will work well. However, if WFC stock makes a bigger than expected move, the trade will suffer losses.

Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. 

Conclusion And Risk Management

Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short-term trades also have assignment risk, so traders need to be aware of that possibility. This type of trade may not be suitable for beginners.

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.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.