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Wells Fargo & Co. (NYSE: WFC) shares make up almost 15% of Warren Buffett's portfolio, and are by far his heaviest bank holding. WFC is the third-heaviest holding in his portfolio, behind Coca-Cola (NYSE: KO) and American Express (NYSE: AXP), at just over 17% and 15%, respectively. Buffett is known for buying and holding stocks, profiting as these picks rise over time. WFC has stagnated somewhat this year, but with its 3.5% dividend, it can still bring nice returns for those who follow Buffett's lead. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WFC.
The stock jumped sharply following yesterday's rate cut, and today's momentum has lifted it to match its previous one-year high. WFC opened this morning at $37.38. So far today, the stock has hit a low of $37.35 and a high of $37.99. The chart for WFC looks bullish but deteriorating slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $32.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just 4 months as long as WFC is above $32.50 at January expiration. Wells Fargo would have to fall by more than 14% before we would start to lose money.
WFC hasn't been below $32.50 at all in the past year and has shown support around $35 recently. This trade could be risky if the economic situation continues to deteriorate, but even if that happens, this position could be protected by the strong support the stock formed between $33 and $36 over the past six months.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in WFC.
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