Options Intelligence Report: Wells Fargo & Co. (WFC) & Moody's Corp. (MCO)

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TARP-Repay Strategy At WFC Inspires Bullish Option Players

WFC ñ Wells Fargo & Co. ñ A pair of bullish risk reversals traded in the April contract on Wells Fargo today after the firm revealed plans to sell $10.65 billion of common stock to help repay borrowed government bailout funds. WFC follows the lead of other banking giants, such as Bank of America, JPMorgan and Citigroup, who have either paid back the U.S. government or intend to do so. Shares of WFC increased 2% as of 12:20 pm (EDT) to $26.00 on the TARP-repay news.

Optimistic investors utilized the bullish risk reversal strategy to position for a rebound in WFC shares by expiration in April 2010. One trader sold 6,000 puts at the April 26 strike for 2.36 apiece in order to buy 6,000 calls at the same strike for 2.50 each. The investor paid a net 14 cents per contract for the transaction. Profits accrue for the trader if shares rally at least 14 pennies over the current price to surpass $26.14 by expiration.

The other reversal involved the sale of 3,000 puts at the April 24 strike for 1.60 apiece, marked against the purchase of the same number of calls at the higher April 27 strike for 2.04 each. This WFC-bull paid a net 44 cents per contract for the transaction and profits if the stock trades above $27.44 by Aprilís expiration day. Option implied volatility on WFC fell roughly 9% to 40.06%.  

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MCO ñ Moodyís Corp. ñ The credit ratings provider attracted long-term bearish option traders today as shares slipped 2.5% to $25.90. One pessimistic player targeted the January 2011 contract to establish a bearish risk reversal on the stock. It appears the investor sold 9,500 calls at the January 35 strike for a premium of 1.85 apiece in order to partially offset the cost of buying the same number of put options at the lower January 17.5 strike for 2.03 each.

The net cost of the reversal play amounts to 18 cents per contract. The transaction suggests the trader expects MCOís shares to plummet over the next 13 months. Shares must decline 33% from the current price before the investor breaks even at $17.32.

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