Bank Earnings Season Sparks Heavy Options Trading

Options traders are bracing for a large earnings move from AXP shares

Jan 16, 2019 at 1:30 PM
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Financial earnings season is in full swing, with traders today cheering quarterly results from big-cap bank Goldman Sachs (GS). With earnings from Morgan Stanley (NYSE:MS) and American Express Company (NYSE:AXP) due out tomorrow, Jan. 17, options traders have been blasting the Financial Select Sector SPDR Fund (XLF).

XLF Eyes Longest Win Streak Since 2014

Today, roughly 52,000 calls and 40,000 puts have changed hands on XLF so far, about 1.8 times the average intraday amount. More than 11,000 contracts have crossed the February 26 call, and it looks like new positions are being purchased for a volume-weighted average price (VWAP) of $0.19. If this is the case, breakeven for the call buyers at February options expiration is $26.19 (strike plus premium paid).

More broadly, options traders have bought to open puts over calls at an accelerated  clip. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the fund's 10-day put/call volume ratio of 1.93 ranks in the 83rd annual percentile.

On the charts, XLF reversed lower after an unsuccessful test at the $27.50 level in mid-December, bottoming at a two-year low of $22.05 on Dec. 26. The shares have now retraced 61.8% of this sell-off -- up 2.3% today at $25.47, on pace for its ninth straight win, which would mark its longest daily win streak since late 2014.

xlf daily chart jan 16

Bulls Blast Morgan Stanley Before Earnings

Morgan Stanley is slated to report fourth-quarter earnings ahead of the open tomorrow. The stock has closed higher the day after earnings in the last seven quarters, averaging a gain of 2.4%. This time around, the options market is pricing in a 6.9% next-day move, regardless of direction.

Options traders appear to be positioning for another positive earnings reaction. Around 50,000 calls have changed hands so far today, six times what's typically seen at this point. Buy-to-open activity is likely occurring at the January 2019 45- and 46-strike calls, implying expectations for continued upside through front-month options expiration at this Friday's close.

At last check, MS stock is up 4.1% at $44.62, on pace for its fourth straight win and its first close north of its 80-day moving average since late September. This trendline has helped usher Morgan Stanley to a nine-month loss of 16%, and the bank stock has averaged a one-month loss of 2.9% after its last nine run-ups to this moving average, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

ms daily chart jan 16

American Express Options Price In Big Earnings Reaction

American Express will unveil its fourth-quarter results after tomorrow's close. For Friday's trading, the options market is expecting a post-earnings swing of 6% -- nearly double the 2.9% next-day move the stock has averaged over the last two years, and well above the 3.8% one-day gain back in October.

Short-term options traders are more put-skewed than usual at the moment, per AXP's Schaeffer's put/call open interest ratio (SOIR) of 1.52 -- in the 88th annual percentile. This could create tailwinds for the shares, as the hedges related to these bets unwind ahead of expiration.

Today, AXP is up 1.4% at $99.34, extending a recent rally off its late-December lows. Specifically, the Dow stock has added 11.6% since its Dec. 26 10-month low of $89.05. The shares are now trading back above their 20-day moving average, and are boasting a 4.3% year-to-date lead.

axp daily chart jan 16


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