Options Bulls Banking On Earnings Boosts for JPMorgan, Wells Fargo

Option traders are preferring calls for bank stocks JPM and WFC

Managing Editor
Oct 9, 2017 at 1:27 PM
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Options trading has been extraordinarily heavy on banks stocks JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), as both companies step up to the earnings plate this week. Here's a closer look at how options traders have been placing their bets on JPM and WFC stocks.

The 20 stocks listed in the table below have attracted the highest total weekly options volume during the past 10 trading days. Data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.

MAO Oct 9

Options Traders Targeting Fresh Record Highs For JPM Stock

JPMorgan stock is down 0.6% to trade at $96.31, despite receiving a price-target boost to $110 from $103 at Credit Suisse -- in uncharted territory. In addition, Jefferies hiked its price target on JPM to $111 from $102. The bank stock is fresh off an all-time high of $97.64, notched last Friday, and has rallied 41% in the past year, with recent pullbacks contained by its 180-day moving average.

JPMorgan will report earnings before the open on Thursday, with the shares looking for a boost after turning lower following the last two earnings reports. In anticipation of Thursday, the options market is pricing in a one-day post-earnings swing of 3.1%, per the stock's at-the-money (ATM) implied volatility (IV) data. That's compared to the stock's average one-day post-earnings move of 1.6% over the last eight quarters.

Analysts remain unconvinced of JPM's potential. Of the 17 brokerages covering the bank stock, 10 rate it a tepid "hold." Should JPMorgan Chase deliver an earnings victory on Thursday, it could prompt analysts to revisit their lukewarm outlooks.

Options traders are much more confident, having shown a distinct preference for weekly calls over weekly puts in the past two weeks, with 99,623 of the former and 60,824 of the latter exchanged. Echoing that, the security has a Schaeffer's put/call open interest ratio (SOIR) of 0.67, which is just 8 percentage points from an annual low. This means short-term options traders are more call-skewed than normal. 

The out-of-the-money (OOTM) December 115 call is home to peak open interest, with over 85,000 contracts outstanding. "Vanilla" buyers of the OOTM calls are banking on JPM stock to continue to assault the record books as the year winds down, eventually topping $115.

The good news for options traders is that the equity hasn't disappointed premium buyers during the past year, as evidenced by its Schaeffer's Volatility Scorecard (SVS) of 85 -- which indicates JPM stock has consistently exceeded the options market's volatility expectations.

Wells Fargo Options Buyers Optimistic

Wells Fargo stock is down 0.7% to trade at $55.17, after receiving a price-target cut to $61 from $62 at Jefferies. On the flip side, Credit Suisse -- which weighed in on several bank stocks today -- boosted its price target on WFC stock by $1 to $57.

WFC has tacked on 22% year-over-year, but has struggled to break past the $56-$56.50 area since late March. What's more, while other bank stocks have powered higher in 2017, Wells Fargo shares are trading just a hair above their year-to-date breakeven, as the bank continues to feel the effects of last year's accounting scandal.

WFC stock closed lower in the session subsequent to reporting six out of the last eight times. Regardless of direction, the security has averaged a one-day post-earnings move of 1.7%. This time around, the options market is pricing in a one-day post-earnings swing of 3.6%, per the stock's ATM IV data. 

WFC options traders have preferred calls over puts in the past two weeks, with 53,760 weekly calls exchanged to 45,503 weekly puts. This is reinforced by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where WFC has racked up a 50-day call/put volume ratio of 1.45, which is 7 percentage points from a 52-week high.

Those looking to bet on WFC's trajectory by buying options are in luck, if past is prologue. Wells Fargo stock has consistently rewarded premium buyers over the past year, per its SVS of 92. In other words, WFC has tended to make outsized moves on the charts, relative to what the options market has priced in.

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