11:45am (EST)
After three days of losses, the Nadaq is joining the Dow and is trading higher today. The Dow has posted losses in two of the three trading days so far this week but the overall sentiment remains negative.
The Dow is currently holding 8,325, up 40 points, while the Nasdaq is higher by 20 to 1,684. The break below 8,500 and 1,700 were not good signs but we are still above major support levels. Options expiration for May option contracts expire this Friday so we could see some fireworks as traders get positioned for next week.
The one trade I want to talk about real quick is Wells Fargo. We entered into a Wells Fargo (WFC, $24.95,up $0.75) straddle trade on Tuesday and I wanted to expand on what we are looking for. We are hoping to make 110% on one side of the trade and it doesn’t matter which side of the trade doubles first.
We got into the June 30 calls (FHUFD, $0.75, up $0.10) for $1.20 and the June 23 puts (WFCRI, $1.55, down $0.30) for $1.30.
The puts have traded as high as $2.00 today when the stock fell below $24 while the calls have hit a low of $0.55. The stock has reversed course and is higher now. Our total cost for the trade was $2.50. When one side of the trade hits this price or a little higher, this is when we may want to close out that side of the trade. I say that because it is tricky. What you don’t want to do is close it too early.
The trade could have already made you 10% if you had sold the puts at $2.00 this morning and waited for the calls to bounce back to current levels. If you sold the calls now, you would get another 75 cents which means you would have pocketed $250 or 10% if you had an initial investment of $2,500.
I just wanted to point this out because you don’t always have to wait for one side to double. Wells Fargo is going to continue to be volatile but I’m looking for a bigger move in one direction by the end of next week.
Rick Rouse
Rick@OptionsMentoring.com
