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Morgan Stanley Option Volume Spikes Ahead of Earnings

Both option bulls and bears are gambling on MS

by 1/17/2013 2:39 PM
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Options are trading at warp speed on Morgan Stanley (NYSE:MS - 20.56) today, with speculators rolling the dice on the stock's post-earnings trajectory. In afternoon action, the financial concern has seen around 51,000 calls and 41,000 puts cross the tape, nearly doubling its typical intraday volume.

On the bulls' side, investors are scooping up the April 25 call, which has seen about 5,250 contracts traded on open interest of fewer than 1,800 contracts, pointing to fresh initiations. Plus, 100% of the calls have crossed at the ask price, suggesting they were bought. By purchasing the calls at a volume-weighted average price (VWAP) of $0.17, the buyers are expecting MS to muscle atop the $25.17 level (strike plus VWAP) -- in territory not charted since mid-2011 -- within the next few months.

On the bears' side, it appears traders are establishing new positions at the February 19 put, which has seen 5,100 contracts change hands. The majority of the puts have traded at the ask price, and implied volatility is on the rise, hinting at buy-to-open volume. By purchasing the puts for a VWAP of $0.28, the buyers are looking for MS to breach the $18.72 level (strike minus VWAP) by the closing bell on Friday, Feb. 15, when the options expire.

From a broader sentiment standpoint, the bears rule the proverbial roost. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.63 stands higher than 76% of all other readings of the past year. In other words, option buyers have initiated pessimistic positions at an accelerated clip during the past couple of weeks.

In the same vein, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.00 sits just 17 percentage points from a 52-week peak, implying that short-term options speculators are more put-biased than usual right now.

Technically speaking, the shares of MS have powered more than 67% higher since skimming the $12.25 region in June, with the most recent leg of their uptrend underscored by support at their 10-day moving average. In fact, just yesterday MS hit a 10-month high of $20.86, after the company and Goldman Sachs (NYSE:GS) agreed to pay $557 million to settle a foreclosure suit, and after MS announced plans to defer high-end bonuses.

The firm is slated to unveil its fourth-quarter figures bright and early tomorrow. Historically, Morgan Stanley has missed Wall Street's bottom-line earnings estimates in three of the past four quarters, according to Thomson Reuters.


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