Rabu, 27 November 2024

EXPOSED: Why I Just Shorted Wells Fargo

November 27, 2024 | Read Online

Don Kaufman here.

I want to talk to you about a trade I put on today in Wells Fargo that's actually quite interesting, and it's all about playing the post-election reality check that might be coming.

So here's what we did: We bought the December 27th 78/76 put spread in WFC for 90 cents. And let me tell you why this timing is particularly interesting.

Look at these numbers - they're actually insane. WFC is up 77.59% over the past year, 56.48% year to date, and nearly 18% in just the last month.

But that's not the main reason why I put this trade on.

If you look at the chart above, you'll see that WFC has hit its upper edge of its expected move 3 weeks in a row.

Understanding Expected Move 📈

Expected move is probably one of the most powerful concepts in options trading, and here's why: It's essentially the market telling us how much a stock is likely to move in a given timeframe.

This isn't just some random guess - it's derived directly from options prices, which reflect the collective wisdom of millions of dollars of institutional money.

Think about it like this - every week, the options market prices in a range where it expects a stock to trade. For WFC, this range is calculated using the straddle price, which gives us a one standard deviation move.

In statistical terms, this means the stock should stay within this range about 68% of the time.

Now, here's where it gets interesting.

When a stock hits the upper edge of its expected move, that's already something that should only happen about 16% of the time.

But hitting it three weeks in a row? That's like flipping a coin and getting heads three times in a row - the probability gets smaller with each occurrence.

Let me put some numbers on this.

If we assume each week is independent (which it roughly is), the probability of hitting the upper edge three weeks in a row is about 0.4% (0.16 × 0.16 × 0.16).

That's rare, folks. Really rare.

And that's exactly why this trade setup is so compelling.

We're not just betting on a pullback because the stock is up a lot - we're playing a statistical anomaly that's screaming for mean reversion.

When you combine this with our defined risk spread strategy, where we're risking 90 cents to make $1.10, we've got ourselves a high-probability setup with favorable risk-reward.

This is how the professional money looks at the market - not just price action, but the statistical probabilities behind the moves.

And when you see a setup like this, where the probabilities are this skewed, that's when you want to get involved.

The banking sector has been absolutely on fire since Trump's election victory, and for good reason - the market's pricing in expectations of a more bank-friendly regulatory environment.

But here's the thing - and this is important - markets tend to overshot both ways.

Right now, we're seeing what I call the "celebration phase" after the election. At some point, and usually sooner rather than later, reality has to set in.

Trees don't grow in the sky, as they say.

Here's why this trade structure makes sense:

Our risk is capped at 90 cents with $1.10 potential profit
We don't need a crash - just a healthy pullback to 76
The vertical spread helps us avoid the high cost of buying puts outright
After hitting the upper expected move three weeks in a row (a 0.4% probability), mean reversion becomes more likely

For my money and for what it's worth, this trade is about playing the statistics.

The expected move is telling us something important - when a stock hits the upper range three consecutive weeks, the odds of continuation start dropping significantly.

And if I'm wrong?

We're out 90 cents, and we live to trade another day.

That's how you trade this market - with defined risk and letting the probabilities work in your favor.

GET MY NEXT 3 TRADES FOR JUST $7 🤑

This WFC trade is exactly the kind of setup I look for every single week - where probability, price action, and risk management all line up perfectly.

And it's the kind of trade I share with my subscribers regularly.

Right now, you can get my next 3 best trading opportunities - just like this WFC setup - for only $7.