3 Pre-Earnings Trades: JPM, WFC, BAC

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Second-quarter earnings season kicks off with a bang this week, as several heavy hitters from the financials sector are poised to step into the earnings confessional this week.

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Up first on the docket are JPMorgan Chase (JPM), Wells Fargo & Co. (WFC) and Bank of America (BAC).

Bank stocks have weathered some choppy seas during the past quarter thanks to fears of a Greek debt default and headwinds from a looming interest rate hike from the Federal Reserve.

Still, the overall direction for financials has been up for the past quartet (and could get better now that a Greek bailout plan seems to be in place). In fact, the Financial SPDR (XLF) has trended higher along support at its 20- and 52-week moving averages since mid-2012.

With bank stocks clinging to a strong technical backdrop, let’s see how the rest of the picture is shaping up ahead of earnings from JPM, WFC and BAC.

Bank Stocks: JPMorgan Chase (JPM)

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JPMorgan Chase (JPM) will step up to the plate ahead of the open Tuesday morning. Wall Street is expecting the banking giant to post a profit of $1.44 per share, down 2 cents from year-ago levels. Revenue, meanwhile, is seen falling about 3.2% year-over-year.

Despite the year-over-year declines, analysts remain bullish on JPM’s outlook.

For one, EarningsWhisper.com reports that JPM’s second-quarter whisper number comes in at $1.50 per share, six cents better than the consensus. Furthermore, Thomson/First Call data points out that 24 of the 31 analysts following JPM rate the shares a “buy” or better.

Options traders, however, remain wary of JPM. The stock’s July/August put/call open interest ratio currently rests at 0.71, with put open interest higher than usual heading into a quarterly earnings report. That said, JPM is trading north of peak put (8,066 contracts) and call (21,810 contracts)open interest for the July series at the $65 strike, alleviating a potential sticking point.

Overall, July implieds are pricing in a potential post-earnings move of about 2.9% move for JPM stock. This places the upper bound at $68.96, while the lower bound lies at $65.04.

The Trade: Traders looking to side with the options community ahead of JPM’s quarterly report might want to consider an Aug $67.50 put, which was last asked at $1.89, or $189 per contract. Breakeven for this trader lies at $65.61.

Bank Stocks: Wells Fargo (WFC)

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Wells Fargo (WFC) will join JPM in the earnings limelight tomorrow morning. Analysts currently have the banking firm’s earnings pegged at $1.03 per share, up from $1.01 per share last year. Wells Fargo also is expected to see a year-over-year rise in revenue, up 3% at $21.69 billion.

Optimism is considerably thinner for WFC stock, compared to JPM. While EarningsWhisper.com sets out a whisper number of $1.06 per share, 19 of the 32 analysts following WFC stock rate it a “hold” or worse. Additionally, the 12-month price target of $58.50 represents a miniscule premium to Friday’s close.

That said, options traders are considerably more upbeat on WFC stock. The July/August put/call open interest ratio for Wells Fargo stands at 0.37, with call nearly tripling puts among options set to expire within the next two months. WFC stock is also trading north of peak July call open interest of 28,241 at the 55 strike, though another 26,667 calls are open at the $57.50 strike. I wouldn’t be surprised to see some call spread activity between these two strikes.

Overall, July implieds are pricing in a potential post-earnings move of about 2.44% for WFC stock. This places the upper bound at $57.45, while the lower bound lies at $54.71.

The Trade: Those traders looking to side with the options bulls ahead of the event might want to consider an Aug $55 call. This option was last asked at $1.73, or $173 per contract. Breakeven lies at $56.73.

Bank Stocks: Bank of America (BAC)

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Finally, Bank of America (BAC) will release its quarterly report this Wednesday. Wall Street is expecting a profit of 36 cents per share from the banking behemoth, up sharply from earnings of just 19 cents per share in the year-ago period. Revenue is seen falling 3% to $21.3 billion.

There is plenty of optimism to go around on BAC stock. EarningsWhipser.com reports a Q2 whisper number of 38 cents per share, while 18 of the 31 analysts following BAC rate the stock a “buy” or better.

Unlike WFC and JPM, options traders are in agreement with the brokerage bunch. Currently, BAC stock’s July/August put/call open interest ratio rests at 0.43, with calls more than doubling their put counterparts. As you might have seen in my daily Vital Data articles, BAC has long been quite a favorite among call options traders.

Overall, July implieds are pricing in a potential post-earnings move of about 3.6%. This places the upper bound at $17.30, while the lower bound lies at $16.10.

The Trade: Traders looking to side with the bulls ahead of BAC’s quarterly report might want to consider an Aug $17 call. This option was last bid at 41 cents, or $41 per contract, at the close on Friday. Breakeven lies at $17.10.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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