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Bulls Forecast a Post-Earnings High for Wells Fargo

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WFC sees a spike in pre-earnings call activity.

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As Wells Fargo (NYSE:WFC) prepares to take its turn in the earnings confessional this Friday, speculators upped the bullish ante on the financial services firm yesterday. During the course of the session, roughly 46,000 calls changed hands, which was a 61% increase over the security's average single-session call volume. By contrast, around 21,000 puts were traded. It appears that some of Wednesday's bulls are hoping for a post-earnings boost significant enough to top the stock's four-year high of $38.20, tagged less than a month ago.

Digging deeper, the April 38 call received the most attention, with more than 17,700 contracts crossing the tape -- a large chunk of them at the ask price, implying they were bought. These near-the-money calls were exchanged at a volume-weighted average price (VWAP) of $0.44. Meanwhile, open interest at this strike rose by 14,404 contracts overnight, confirming the initiation of new positions.

By purchasing these calls to open, traders are counting on Wells Fargo to muscle north of $38.44 (strike price plus the VWAP) by front-month expiration, which occurs at next Friday's close. This would entail a rise of 2.3% from the stock's current price of $37.57, as well as territory not charted since October 2008. As of yesterday's closing bell, the delta for these calls was docked at 0.39, giving them a 39% chance of arriving in the money.

This rise in near-term call activity is simply more of the same for the banking behemoth. Schaeffer's put/call open interest ratio (SOIR) for WFC stands at 0.69, indicating calls outweigh puts among options slated to expire in the next three months. This ratio is just 4 percentage points above a 12-month low, meaning short-term traders have rarely been more bullishly aligned toward the stock during the past year.

From a technical standpoint, WFC has advanced about 10% year-to-date, and nearly 12% on a year-over-year basis. What's more, the stock has recovered about 20% since touching a mid-November low of $31.25. On the charts, the shares continue to trade atop their ascending 10-week moving average, which has acted as support since mid-December.

As my colleague Karee Venema noted last week, Wells Fargo due to release first-quarter earnings ahead of this Friday's open, and has bested consensus bottom-line estimates in each of the past four quarters. However, according to data from Thomson Reuters, the stock was trading lower both the next day and a week after its earnings release in three of those quarters. Nevertheless, should the security fail to meet the expectations of yesterday's bulls, the most they stand to lose is the initial premium paid for their short-term call positions.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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