EOT Trade Alert – May 25, 2010

Corey Williams | May 25, 2010

May 25, 2010

Trade Alert:

Buy WFC July 17 2010 $28 Puts at $2.05 or better

Company Background:

Wells Fargo (WFC) is a large regional bank offering a wide array of banking and other financial services.

Short-Term Catalyst:

The European debt crisis continues to mount.

Is systemic failure of the world’s financial system a sure thing?

Not at this point… But fear of a system failure is driving investors out of any risky assets. And no sector is more vulnerable to these fears than financials, especially banks.

Even if the worst case scenario doesn’t play out, the prospects for economic growth are severely damaged. Higher taxes and less government spending across the EuroZone will put a dent in corporate earnings.

Now North Korean saber rattling is further undermining investor confidence. The steady diet of bad news spells more trouble ahead.

And it doesn’t get better closer to home. The expiration of the housing tax credit will hurt the housing market, and in turn, the banks that make a lot of money financing mortgages.

Clearly the bad news is stoking investors’ fears. And it should send WFC’s stock down in the short term.

On a technical basis, bearish momentum in WFC is building.

WFC crossed the 200-day moving average to the downside today. And the 20-day moving average just crossed the 50-day moving average to the downside as well. Both are very bearish signals.

Let’s grab these puts on WFC now, before it takes another leg down.

Trade Details:

Underlying Stock Symbol:	WFC
Current Bid-Ask Price:	$1.94 – $1.96
Option “Buy Up To” Price:	$2.05
Break-Even On Stock At Expiration:	$25.95
Maximum Risk Per Contract:	$205

Exit Strategy:

WFC is trading at $28.29 per share. Resistance levels will be at $29.75 and again at $30.50. Remember, we want this stock to move lower. Support levels will be at $26.25 and $25. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

Chart: