Wells Fargo & Company (WFC)

In last week's edition of Trading Tools, I examined Delaware-based financial firm Wilmington Trust Corporation (WL - Analyst Report), as it appeared on the Zacks Put/Call Ratio Greater than 1.0 filter. Utilizing the same screener this week, in an effort to find stocks surrounded by heavy pessimism in the options arena, another equity caught my eye: Wells Fargo & Company (WFC - Analyst Report) .

The Put/Call Ratio Greater than 1.0 Screener

First, an explanation on our stock screener. The filter looks for stocks with a high put/call open interest ratio, indicating puts outnumber their call counterparts amongst near-term options. Why is this important? Simply put, a high Schaeffer's put/call open interest ratio (SOIR) – measuring options slated to expire within 3 months – suggests that expectations for the security to rally are extremely low. In other words, a high ratio usually indicates pessimism amongst short-term options speculators.

From a contrarian perspective, we are looking for a stock that has low investor expectations (such as heavy put trading) and a strong technical performance. This combination of strength on the charts and skepticism among option traders leaves substantial room for continued upward momentum should these bearish bets unwind.

Bearish bets continue to bulk up

As mentioned above, WFC stuck out due to its unusually high SOIR. More specifically, the financial firm's SOIR is currently docked at 2.65, indicating that puts more than double their call counterparts among near-term options. Furthermore, this ratio ranks in the 87th annual percentile, meaning short-term options speculators have been more skeptical of the stock only 13% of the time during the past year.

Digging even further into the data, we find that the pessimism surrounding WFC continues to rise. During the past 10 days on the International Securities Exchange (ISE), the stock has seen more than 3 times as many puts than calls bought to open, for a put/call volume ratio of 3.27. This ratio's annual rank of 85% tells us that during the past couple of weeks, puts were added at a faster pace than usual on the ISE.

The Bottom Line

In conclusion, WFC followers should keep an eye on the overhead 38 level as a potential layer of resistance. This region acted as a long-term barrier in the past, and could be resuming its role now. More importantly, however, fans of the financial firm should take heed to the lingering skepticism surrounding the shares. Should the stock manage to continue its recent run higher, the bears in the options pits and brokerage bunch could flock to the bullpen, which could place additional buying pressure on the equity.