Earnings season begins to pick up speed this week, and financials are set to take center stage. Industry giants JPMorgan Chase (JPM) and Wells Fargo (WFC) kick off financial sector earnings on Friday morning, while beleaguered Citigroup (C) is set to release its quarterly report ahead of the open on Monday.
Financials have been extremely strong during the past couple of years, with the Financial SPDR (XLF) gaining nearly 90% since September 2011 … but can JPM, WFC and C stock continue to keep pace?
We take a look at all three — as well as options trades to make ahead of each financial stock’s report:
Pre-Earnings Trades on Financials: JPMorgan Chase (JPM)
Click to Enlarge Wall Street will be looking for earnings of $1.42 per share when JPMorgan Chase (JPM) kicks off the earnings slate for financials on Friday morning. The brokerage community has high hopes for the banking giant, however, with EarningsWhisper.com revealing that the whisper number for JPM earnings arrives at $1.48 per share, 6 cents higher than the consensus.
This optimism is also apparent given analyst ratings on JPM stock, with the equity attracting a whopping 26 “buys” compared to six “holds” and just one “sell” rating. There is room for improvement, however, as the consensus 12-month price target for JPM stock rests at $66.50, representing a premium of only about 13% to yesterday’s close.
Options traders are heavily bullish toward JPM stock, too. Specifically, the security’s April/May put/call open interest ratio of 0.49 indicates that calls are more than twice as popular as puts among options set to expire within the next two months. Traders are heavily focused on the out-of-the-money April 60 call, where 73,387 contracts are currently open. Another 47,441 calls reside at the overhead 62.50 strike.
Turning to weekly April 11 options activity, we find that implieds are pricing in a relatively tame potential post earnings move of about 2.5% for JPM stock. This places the upper bound at $60.47, while the lower bound lies at $57.53.
Options Trade for JPM Stock: Bull Call Spread
Traders looking to jump on the bullish JPM bandwagon might want to consider a May 57.50/62.50 bull call spread.
This spread currently is offered at offered at $2, or $200 per pair of contracts. Breakeven lies at $60, while a maximum profit of $3, or $300 per pair of contracts, is possible if JPM closes at or above $62.50 when May options expire.
Pre-Earnings Trades on Financials: Wells Fargo (WFC)
Click to Enlarge Wells Fargo (WFC) will be JPMorgan’s reporting buddy when financials start announcing earnings Friday morning, with Wall Street looking for a profit of 96 cents per share. Analysts aren’t nearly as pumped up about Wells Fargo earnings as they are about JPM’s, however, with the company’s whisper number arriving a mere 2 cents ahead of the consensus at 98 cents per share.
Furthermore, WFC stock has a few more detractors in the brokerage community. In fact, 21 of the 33 analysts following the shares rate them a “hold” or worse, compared to 13 “buy” ratings. What’s more, the 12-month consensus price target of $50 per share rests a mere 2.4% above WFC’s close at $48.83 on Tuesday.
Options traders, however, appear to have high hopes for WFC. For instance, the stock’s put/call open interest ratio for the April/May series arrives at 0.77, with calls easily outnumbering puts among options set to expire in the front two months.
Drilling down, we find that peak call open interest totals 19,743 contracts at the in-the-money April 48 strike, while another 19,300 contracts reside at the overhead April 49 strike. Peak put open interest, meanwhile, totals 14,361 contracts at the out-of-the-money April 48 strike.
Overall, options traders are not expecting a big post-earnings move out of WFC, with weekly April 11 implieds forecasting a potential move of about 2.1%. The upper bound for this move lies at $50.04, while the lower bound rests at $47.96. These levels coincide with WFC stock’s recent trading range, with short-term resistance at $50 and support near $48.
Options Trade for WFC Stock: Bull Call Spread
While there is a lack of confidence among Wall Street analysts, there still appears to be plenty of fuel left in the tank for WFC stock. As such, traders looking to position themselves ahead of Wells Fargo earnings might want to consider a May 48/50 bull call spread.
This spread was last offered at 93 cents, or $93 per pair of contracts. Breakeven lies at $48.93, while a maximum profit of $1.07, or $107 per pair of contracts, is possible if WFC closes at or above $50 when May options expire.
Pre-Earnings Trades on Financials: Citigroup (C)
Click to EnlargeFinancials take a break over the weekend, then Citigroup (C) will step into the earnings limelight ahead of the open on Monday morning, with Wall Street looking for a profit of $1.16 per share from the banking behemoth. There is currently no whisper number reported for Citigroup earnings, but there is plenty of sentiment to be had on C stock — all of it quite bullish.
For instance, C stock has attracted a hefty 24 “buy” ratings from the brokerage community, compared to just five “holds” and two “sells.” Meanwhile, the stock’s 12-month consensus price target of $58 per share arrives roughly 25% above yesterday’s close.
The real bullish sentiment, however, can be found in Citigroup’s options pits. Specifically, nearly 657,000 calls are open in the April/May series of options for C stock, versus put open interest or roughly 328,000 contracts. The result is a very bullish April/May put/call open interest ratio of 0.5. Furthermore, that ratio drops even further for weekly April 19 open interest, coming in at 0.48, with calls more than doubling puts for options set to expire the week of Citigroup earnings.
Taking a closer look at C’s weekly April 19 options reveals that implieds are pricing in a potential post earnings move of about 3.8%. As such, the upper bound lies at $48.78, while the lower expected move resides near $45.22. These levels correspond with technical overhead technical resistance at C’s declining 50-day moving average, and potential technical support near $45.
Technically speaking, C has broken down sharply of late, and is trading below all of its key daily and weekly moving averages. Currently, the stock is hovering just above support in the 45 region, and a breach of this area would place C in 52-week low territory. Such a downside breakout could spark additional selling pressure, as the aforementioned bullish sentiment unwinds.
Options Trade for C Stock: Bear Put Spread
Given the excessive optimism for C stock, and the shares’ poor price action, traders looking to position themselves ahead of Citigroup’s earnings might want to consider a May 45/47 bear put spread.
At the close of trading on Tuesday, this spread was offered at 90 cents, or $90 per pair of contracts. Breakeven lies at $46.10, while a maximum profit of $1.10, or $110 per pair of contracts, is possible if C stock closes at or below $45 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.