Option bulls could be blindsided by a post-earnings retreat
Big bank earnings will roll in on Friday, with JPMorgan Chase & Co. (NYSE:JPM) among the companies slated to report. While JPM stock is on pace for its best week in two months and on Monday enjoyed its biggest one-day percentage gain of 2018, the shares are now sending up a historical short-term "sell" signal on the charts.
Since notching a record high of $119.33 in late February, JPMorgan stock has surrendered more than 10%. The stock seems to have found support in the $105 area -- representing a 38.2% Fibonacci retracement of its rally from mid-2017 to the aforementioned high -- but is now back within striking distance of its overhead 40-day moving average, potentially sending up a bearish warning, if past is prologue.
There have been just six other times where JPM stock has come within one standard deviation of its 40-day trendline after: sitting below the moving average for 60% of the time over the past two months; and ending south of the moving average at least eight of the last 10 trading sessions. After those instances, JPM shares were lower one week later every single time, averaging a drop of 2.5%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. At last check, the bank stock was up 0.3% at $106.93; a similar pullback in the next week would put JPM around $104.26, south of the $105 level.
It should also be noted that JPMorgan Chase stock retreated 2.7% the day after the company's mid-April earnings report. In fact, the security has ended lower the session after four of the last five earnings releases.
Nevertheless, it seems options buyers are betting on a big bounce for the shares. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows JPM has racked up a 10-day call/put volume ratio of 3.57 -- the very top of its annual range. In other words, JPM options traders have initiated bullish bets over bearish at a much faster-than-usual pace during the past two weeks.
As such, the equity's Schaeffer's put/call open interest ratio (SOIR) sits at 0.53, indicating calls nearly double puts among options set to expire within three months. This ratio is at the bottom of its 52-week range, suggesting near-term traders haven't been more call-biased on JPM during the past year.
The July 115 and 110 calls carry the most open interest among all JPMorgan options, with roughly 26,000 and 23,000 contracts outstanding, respectively. It appears the majority of the calls were bought to open, too, suggesting the traders expect a rebound north of the strikes before the options expire on Friday, July 20. Should the bank disappoint in the earnings confessional later this week, a mass exodus of option bulls could weigh on the shares.