The Only Bank Worth Trading This Week

By the time you're reading this, we'll have a slew of bank earnings out, and the fortunes (or misfortunes) for these stocks will manifest. I've looked at all the major bank earnings coming up from JPM, C, GS and the one which interests me the most is WFC.

Why?

Because after looking at my PFP (positioning, flows and price action) system, WFC is setup for the best trade opportunity.

Let me show you.

Options Positioning in $WFC

Out of all the gamma positioning maps between the banks, WFC had the most interesting structure. The top gamma strike (TGS) is at $70, which is where price action has been parked since December 16. With only a few points above/below, $70 has established itself as ‘fair value'.

Earnings releases tend to push markets away from fair value over the coming sessions, weeks and months, especially as analyst ratings adjust. In terms of ‘where' I think WFC can go, I have two clear options positionally.

Above is the top call strike (TCS) at $75. This becomes an obvious target for bulls while the top put strike (TPS) is below at $65, thus becoming a bear target. A very tidy ‘framing' with the positioning, thus I just need the earnings to move the needle enough to push up or down.

Price Action in $WFC

Looking at the 4hr chart below, we've spent slightly more time above $70 then below it. This was due to the Trump-Bump with the stock settling at fair value.

Because we've recently been at $65 and $75, both are reasonable targets from a price action perspective that bulls or bears would target respectively.

Flows in $WFC

Flows on the day have been quite bullish in anticipation of the earnings. This is shown by the notional delta reading (as of this writing ~40mins before market close on Tuesday) to be over 15M. For reference, the 30-day record is 14M, so we're above the 30-day high.

This communicates heavy participation in anticipation of the earnings, with bulls buying calls and bears selling puts. Both sides of the option market are bullish, yet the stock has barely budged. This is either longer dated flows, or short calls taking profits and long puts following suit.

How We're Trading $WFC

Looking at the implied move for the week, we're estimating a $3 move up or down from the earnings print. That fits snugly inside the $75/$65 positional range. If most banks produce bullish earnings, $75 looks workable while failing to impress would put $65 under watch.

I can't do a long iron condor as I think its too pricy and offers a risk/reward that is uninteresting. I can do long straddles further out in time to avoid the earnings IV crush, or buy a bull call spread while picking up some long puts to protect my downside.

I'll share my trade ideas in real time with members of the Benzinga Option School or Trading Waves, so make sure to join and see how I'm trading it. I hope to see you there soon.

Image via Midjourney