3 Bank Stocks With Bargain-Bin Options

Bank stocks JPM, MS, and ZION sport attractively priced options contracts right now

Mar 21, 2017 at 2:52 PM
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Bank stocks are in focus today, with the once red-hot sector on pace for its worst day since mid-January. While some options traders are betting on summer rebounds for the Financial Select Sector SPDR Fund (XLF) and Bank of America Corp (NYSE:BAC), investors searching for bargain-basement bank options should consider the following three stocks: JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), and Zions Bancorp (NASDAQ:ZION).

Recent JPM Options Traders Could Be Nervous

JPM popped up on our radar, as the stock's Schaeffer's Volatility Scorecard (SVS) stands at a lofty 85. In a nutshell, elevated SVS readings indicate the underlying stock has tended to exceed options traders' volatility expectations in the past year -- a boon for options buyers. What's more, the stock's Schaeffer's Volatility Index (SVI) of 17% is higher than just 17% of all other readings from the past year, indicating JPM's near-term options are attractively priced right now, from a historical standpoint.

At last check, JPM shares were down 2.7% at $87.60, among the leading Dow laggards. JPM is now on pace to breach its 50-day moving average for the first time since late September, when the stock was trading in the $65 zone. Since that time frame, JPM shares have rocketed roughly 35% higher, touching a record high of $93.98 on March 1.

A handful of recent options buyers could be getting nervous today. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), JPMorgan Chase & Co. has racked up a 10-day call/put volume ratio of 2.34 -- in the 98th percentile of its annual range. In other words, speculators have bought to open JPM calls over puts at a near annual-high clip during the past two weeks. Today, however, JPM puts have the edge, with 63,000 contracts exchanged -- twice the average intraday pace -- compared to 59,000 calls.

MS Options Traders Buying Puts

MS also boasts the combined duo of a high SVS and a low SVI. Specifically, Morgan Stanley sports an SVS of 87, while its SVI of 23% is in just the 13th percentile of its annual range. Again, this particular combination indicates MS' near-term options are attractively priced, and that the stock has made bigger-than-expected moves in the past 12 months.

As with other banking stocks, MS is taking a hit today, down 4.1% at $42.77. The shares are in danger of their lowest close since early February, after notching a post-financial crisis high of $47.33 not two weeks ago. Further, MS could end the week beneath its 20-week moving average for the first time since late June, just before the Brexit shocker.

Unlike JPM, though, Morgan Stanley options buyers have initiated bearish bets at a faster-than-usual clip lately. The stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.31 is in the 80th percentile of its annual range. That affinity for puts has carried over today, with about 25,000 contracts traded -- twice the intraday average -- compared to fewer than 24,000 MS calls. Short sellers have also piled on recently, with short interest surging 42.9% during the past two reporting periods.

ZION Short Sellers, Options Buyers Bearish

ZION options are the most attractive of the three bank stocks featured. The stock's SVS sits at a sky-high 96, while its SVI of 24% is lower than 91% of all other readings from the past 52 weeks.

ZION more than doubled from February 2016 to its eight-year high of $48.33 on March 1. Today, however, the shares are down 5.5% at $40.80, on pace to breach support in the $41-$42 area, which has contained pullbacks in 2017. In fact, ZION is now in the red year-to-date, down 5.3%.

As with MS, Wall Street was seemingly expecting a cooling-off period for Zions Bancorp shares. Short interest represents nearly eight sessions' worth of pent-up buying demand, at ZION's average daily trading volume, and while options volume is light on an absolute basis, long puts have been the contracts of choice, as evidenced by ZION's 10-day put/call volume ratio of 7.53 -- in the 77th percentile of its annual range. Today, in fact, ZION put volume is running at four times the average intraday clip, with more than 3,100 contracts traded, compared to fewer than 500 calls.

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