Earnings Preview: Bank of America Corp and Wells Fargo & Co

Intraday options activity is heightened on Bank of America Corp (BAC) and Wells Fargo & Co (WFC) ahead of Thursday morning's earnings reports

by Alex Eppstein

Published on Apr 13, 2016 at 2:23 PM

Earnings season got off to a sluggish start, but is picking up steam thanks to better-than-expected results from JPMorgan Chase & Co. (NYSE:JPM). Financial stocks will again be in focus tomorrow, as Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC) are set to report earnings before the open. Below, we'll take a closer look at how options traders have been positioning themselves ahead of BAC and WFC earnings.

  • BAC is up 4.1% at $13.82, as a sector-wide rally offsets reported deficiencies in the firm's "living will." From a longer-term perspective, today's gains represent a dramatic change of pace for the bank stock. Year-to-date, shares of the financial firm have lost nearly 18%.

    Ahead of tomorrow morning's earnings report, BAC options are trading at twice the normal intraday rate, with calls tripling puts. The most active strike is the near-the-money April 14 call, where at least some buy-to-open activity is detected, per International Securities Exchange (ISE) data -- hinting at bullish expectations. Meanwhile, the options market is pricing in a 5.1% single-day post-earnings swing for Bank of America Corp, roughly doubling its usual move. Looking back eight quarters, the stock has finished the post-earnings session lower 75% of the time. If this happens again, a capitulation among today's option bulls could exacerbate BAC's losses.

  • While WFC's "living will" wasn't up to snuff, either, the bank stock is currently 2.9% higher at $49.14. However, the shares are approaching their descending 80-day moving average, which rejected a breakout attempt late last month. Today, put options are running at quadruple the usual intraday clip, and outstripping calls. In fact, the three most active WFC options are puts, including the April 48, January 2017 50, and January 2018 50 strikes. In recent weeks, however, traders have bought to open 1.65 calls for every put across the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX).

    In terms of Wells Fargo & Co's history in the earnings confessional, the stock has given up ground in the ensuing session after six of the last eight reports. On average, the shares post a one-day move of 1.4% in either direction. This time around, though, the options market is pricing in a 3.7% single-session swing for WFC.

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