Let’s face it: Financials are not on anyone’s “hot list” this year. Still, while the Financial SPDR (XLF) has gained only 4% in 2014, the ETF still is mostly keeping pace with the S&P 500 Index.
With earnings season ramping up next week, financials are taking center stage and could potentially set the tone for the week. We’ll be getting reports from industry giants Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (C) arriving early next week, so traders will want to be on point heading into the weekend.
Here’s a look at the earnings landscape for these three financials, as well as a few options trades to make ahead of time.
3 Financials: Wells Fargo (WFC)
Click to Enlarge Wells Fargo (WFC) will slip into the earnings confessional ahead of the open on Tuesday, Oct. 14. Wall Street is expecting a third-quarter profit of $1.02 per share from the banking concern, but the whisper number arrives 2 cents higher, according to EarningsWhisper.com.
Whispered optimism is all analysts are apparently ready to give WFC stock, however. According to data from Thomson/First Call, WFC has attracted just 13 “buy” ratings, compared to 17 “hold” or worse ratings.
What’s more, the 12-month consensus price target of $55 per share rests a mere 7.6% above WFC stock’s close at $51.12 on Thursday.
Options traders also have a bearish lean toward their outlook for WFC. Specifically, the stock’s October put/call open interest ratio arrives at 0.93, with calls (bets that WFC will rally) nearly in parity with puts (bets that WFC will fall) among short-term options.
Overall, options traders are not expecting a earnings-related move from WFC stock, with October implieds pricing in a potential move of about 3.4%, setting the upper bound at $52.51 and the lower bound at $49.49. These levels roughly coincide with WFC stock’s short-term trading range between its 10- and 50-day moving averages. A break above or below either of these trendlines could be a hint at WFC’s direction going forward.
With uncertainty in the broader market, traders should proceed with caution. The recent broad-market selloff has WFC stock trading just above oversold territory, hinting that a rebound could be in the mix — especially if Wells Fargo offers up solid numbers next week. As such, traders looking to position themselves ahead of next week’s earnings Wells Fargo earnings might want to consider a Nov $50/$52.50 bull call spread.
This spread was last offered at $1.33, or $133 per pair of contracts. Breakeven lies at $51.33, while a maximum profit of $1.17, or $117 per pair of contracts, is possible if WFC stock closes at or above $52.50 when November options expire.
3 Financials: JPMorgan Chase (JPM)
Click to Enlarge JPMorgan Chase (JPM) will follow Wells Fargo into the earnings spotlight Tuesday morning. While the consensus is anticipating a profit of $1.38 per share for the financial giant, whispers are calling for earnings of $1.50 per share, hinting at a wealth of bullish sentiment for JPM stock.
This optimism is readily apparent within the brokerage community, with the equity attracting 26 “buy” ratings, compared to only two “holds” and just one “sell” rating. But it’s not exactly screaming bullishness — the consensus 12-month price target for JPM sits just about 13% higher at $67 per share.
And options traders remain unconvinced. Specifically, the security’s October put/call open interest ratio of 0.85 indicates reluctance among call buyers heading into JPMorgan’s quarterly report. Currently, traders are heavily focused on the out-of-the-money Oct $60 call, where 32,831 contracts reside, and the out-of-the-money Oct $57.50 put, where another 32,026 contracts are open.
Turning to implieds, we find that October options are pricing in a potential post-earnings move of about 3.3% for JPM stock. This places the upper bound at $60.98, while the lower bound lies at $57.02. An upside move would place JPM in contention with resistance in the $61-$62 region, while a downside move would break key support at the stock’s 50-day moving average.
If you are willing to side with the analyst community on JPM, then you may want to consider a Nov. $60/$62.50 bull call spread. This spread was last offered at 83 cents, or $83 per pair of contracts. Breakeven lies at $59.83, while a maximum profit of $1.67, or $167 per pair of contracts, is possible if JPM closes at or above $62.50 when November options expire.
3 Financials: Citigroup (C)
Click to Enlarge Finally, Citigroup (C) will also enter the earnings fray on Tuesday, with Wall Street looking for a profit of $1.12 per share. Whispers on EarningsWhisper.com, however, hint that analysts are expecting $1.14 per share from Citigroup — sentiment that falls in line with the rest of the brokerage community.
For instance, C stock has attracted a whopping 19 “buy” ratings, compared to just seven “holds” and one “sell.” Additionally, the stock’s 12-month consensus price target of $59 per share arrives roughly 15% above yesterday’s close.
As with its peers, the bullish sentiment for C stock ends at the edge of the options pits. Currently, the October put/call open interest ratio for C arrives at 1.05, with puts easily outnumbering calls among short-term options. Taking a closer look reveals heavy accumulations of put open interest at the Oct $48 strike (30,370 contracts), the Oct $50 strike (25,372 contracts, and the Nov $50 strike (10,138 contracts), with all currently out of the money.
Compared to JPM and WFC, October options are pricing in a bit more of a post-earnings move for C stock, with implieds pointing toward a potential move of about 3.8%. As such, the upper bound lies at $52.92, while the lower bound arriving at $49.08. Technically, overhead resistance rests at $54, while support appears at 51, which is currently home to C stock’s 50-day moving average.
With the shares blowing off some steam this week, C stock could be in for a rebound early next week, especially if guidance is strong. Traders looking to position themselves ahead of Citigroup’s earnings might want to consider a Nov $50/$52.50 bull call spread. At the close of trading on Thursday, this spread was offered at $1.31, or $131 per pair of contracts. Breakeven lies at $51.31, while a maximum profit of $1.19, or $119 per pair of contracts, is possible if C stock closes at or above $52.50 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.