Case Study: Wells Fargo and GE

When I started trading again in November, I made the mistake of trading Wells Fargo.  It is a good bank, with fairly conservative underwriting.  What convinced me that they were tradeable was that their CEO fought NOT to accept TARP money.  They were forced to take it.

Still, it was a mistake because when there is more financial bad news, as there inevitably would be, Wells Fargo will go down with the Citigroups of the world.

So here is how the trade went:  I sold each put for $2.35 on 30th October 2008.  The strike was $32 per share.  At expiration, 21st November, the bottom of the market in 2008, the stock was at $21.76

Result: $21.76 – $32 + 2.35 =  -$7.89

For the December option series, I sold the 24 call on Wells Fargo.  I was paid $2.15 in premium for writing the covered calls.

At expiration, on 20th December 2008, Wells Fargo was called away from me at 24.

Final score: -$7.89 Nov result + $2.15 call premium + $(24 – 21.76) =  -$3.50

General Electric

GE earns half of its profits from GE Credit and so is a large shadow bank.  I sold puts on GE stock on the 3rd of November, 2008, earning $0.85 in premium per share.  The strike was 19 which was just below where GE was trading.

At expiry, GE closed at $14.03 per share so my loss was $19 – $14.03 = $4.97 on the stock softened by the premium received or $0.85 or a net  loss of $4.12.

Since I was put with stock, I turned around and sold the 15 calls on November 26th earning $1.06

At expiration, 20th December 2008, GE was called away and I was paid $15 per share.

Final score: -$4.12 (November) + $1.06 (call premium) + $15 – $14.03 (uplift in the stock) = -$2.09

Moral Of The Story

Don’t trade financial stocks during a financial meltdown.