Earnings Preview: Wells Fargo & Co, Bank of America Corp, and Goldman Sachs Group Inc

Wells Fargo & Co (NYSE:WFC), Bank of America Corp (NYSE:BAC), and Goldman Sachs Group Inc (NYSE:GS) are on deck to report earnings

by Karee Venema

Published on Jul 14, 2016 at 11:32 AM
Updated on Jul 14, 2016 at 12:33 PM

Aluminum giant Alcoa Inc (NYSE:AA) kicked off second-quarter earnings season with a bang, while Dow component JPMorgan Chase & Co. (NYSE:JPM) followed suit this morning with its well-received results. JPM was just the first in a long line of financial firms getting set to take their turns in the earnings confessional. Looking ahead, big bank Wells Fargo & Co (NYSE:WFC) will unveil its quarterly results tomorrow morning, while sector peers Bank of America Corp (NYSE:BAC) and Goldman Sachs Group Inc (NYSE:GS) will step up to the plate next week. Here's a quick look at the pre-earnings options activity surrounding stocks WFC, BAC, and GS.

Pre-earnings call buyers have been busy in WFC's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 1.50 ranks in the 76th annual percentile. Looking back over the past eight quarters, however, the stock has averaged a post-earnings move of 1.4% in the session subsequent to reporting, with seven quarters resulting in moves to the downside.

Regardless, now appears to be an opportune time to purchase premium on WFC. The equity's Schaeffer's Volatility Index (SVI) of 18% ranks lower than 76% of all comparable readings taken in the past year, meaning premium on WFC's short-term options is pricing in relatively low volatility expectations at the moment, even with the uncertainty of earnings looming. On the charts, Wells Fargo & Co is down 15.4% year-over-year, at $48.88. And while the stock is getting a boost today on JPM tailwinds, it is running out of steam near its 140-day moving average -- a trendline that's contained recent rally attempts.

BAC is also getting a lift from JPM, up 1.7% at $13.68. This positive price action runs counter to the stock's longer-term trajectory, though, with the shares shedding nearly 23% over the past 12 months. In the last eight quarters, meanwhile, BAC has averaged a single-session post-earnings move of 2.6% in the session subsequent to reporting. Even though five of these post-earnings moves have been lower, one group of today's options traders is betting on a positive earnings reaction after the company reports next Monday morning. Specifically, it looks like speculative players may be purchasing new positions at BAC's weekly 7/22 14-strike call, expecting the stock to break out above $14 by next Friday's close, when the weekly series expires.

More broadly speaking, speculators have shown a preference for near-the-money calls over puts among options set to expire in three months or less, per BAC's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.57. Should Bank of America Corp widen its year-over-year deficit in the wake of reporting, an unwinding of the hedges related to these bets could pressure the shares even lower.

Options traders have been loading up on long calls ahead of GS' earnings report -- due out ahead of next Tuesday's open. At the ISE, CBOE, and PHLX, the stock's 10-day call/put volume ratio sits at a top-heavy 2.38, in the 77th percentile of its annual range. This bullish positioning isn't surprising, considering the shares of the Dow stock have rallied almost 17% off their late-June lows to trade at $161.17. Plus, like several of its sector peers, GS has officially erased its post-"Brexit" losses. Nevertheless, it's a prime time for near-term options buyers to strike on Goldman Sachs Group Inc. Not only is the stock's SVI of 24% ranked in the 23rd annual percentile, but its 30-day at-the-money implied volatility of 23.4% is docked lower than 66% of all comparable readings taken in the past year. Summing it all up, pre-earnings volatility expectations are low toward GS.

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