Wells Fargo & Co. (WFC) – Banking stocks took a punch in the gut when Oppenheimer’s rather accurate banking analyst forecast further loan loss provisions due to deteriorating quality of mortgage securities in the fourth quarter of 2008. Included in the dispatch was Wells Fargo, but as if that wasn’t enough, ratings agency Moody’s cut its senior debt rating based on indigestion of Fargo’s acquisition of Wachovia last year, which might increase losses but would certainly lower earnings ahead. WFC lost 2.7% to .81 by noon while the flurry of negative news drove up option plays on the stock. Our market scanners indicate that this security is the most actively traded so far today and has total volume of 211,000 contracts. Investors were quick to sell January expiration calls at the 27.5 strike in anticipation of a further downdraft for its shares. The sale of puts at the strike possibly indicates closing sales of bear positions, while investors also sold puts at the 20 strike and bought those at the 15 strike. Of more interest today was what appears to be a ratio put spread involving the purchase of 28 strike puts in the Feb contract (21,900 contracts) against the sale of 10,950 lots at the February 23 strike. The net debit is 2.35 meaning the trade starts to make money at expiration if shares are below .65 at expiration. Beneath a share price of .35 the investors is effectively short the stock and so loses money. Options implied volatility is only a little higher at 96.5% today.

HSBC Banking Corp. (HBC) ADRs – In November shares of British banker, HSBC dropped on speculation that the prospect for its core Asian revenues was looking shaky and at the time we noted the purchase of a large amount of put options on the stock. It appears that an investor is rolling from January’s expiration to the March expiration today given the volume patterns between the 50 strike at each expiration. The January puts were sold today at 2.05 with HBC trading lower on the session at .78 some 36,000 times while March puts were bought on similar volume at 6.40. Clearly some investor doesn’t see any light at the end of the banker’s tunnel just yet. Option volume of more than 100,000 lots today represents one quarter of the overall open interest on the stock.

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