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Will an Overexposure to Housing End Wells Fargo's Share Premium?


Wells Fargo is especially sensitive to a slowdown in the housing recovery. Here's how to trade it.

Last June, Wells Fargo (NYSE:WFC) was the one US bank to escape a Moody's rating cut, a move largely attributed to the bank's exposure to Europe and investment banking operations.

Since then the stock's movement has been stable, giving investors reason to pay a premium for conservative commercial and consumer banking practices and a lack of emphasis on riskier ventures like credit derivatives.

But ex-regulators and industry experts have questioned whether Wells Fargo is overexposed to the housing market. In Q3 of 2012 the bank originated a staggering $139 billion in residential mortgages -- 29% of those in the country -- with JPMorgan's (NYSE:JPM) $44 billion a distant second. Recently Wells Fargo's reputation as a lender who avoided controversial underwriting practices was tarnished in its settlement of an SEC lawsuit alleging reckless underwriting process. Of Wells Fargo's $1.4 trillion in assets, $312 billion are residential mortgages.

Given this level of exposure, Wells Fargo is especially sensitive to a slowdown in the housing recovery, so my trade is as follows:

Trade: Buying the WFC Jan weekly 35-34 Bear Put Spread for $.30 debit
Risk: $30 per 1 lot
Reward: $70 per 1 lot
Breakeven: $34.70

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