Thursday’s Vital Data: Goldman Sachs, Morgan Stanley and Bank of America

Options activity provides a look at expectations on GS, MS and BAC

U.S. stock futures are trading slightly lower as overhead resistance and overbought conditions threaten to end the market rally. Bank earnings kept the climb alive yesterday, but the falling 50-day moving average that is now being tested could cause trouble.

Thursday's Vital Data: Goldman Sachs (GS), Morgan Stanley (MS) and Bank of America (BAC)Heading into the open, futures on the Dow Jones Industrial Average are down 0.29% and S&P 500 futures are lower by 0.28%. Nasdaq-100 futures have shed 0.15%.

In the options pits, call volume outpaced puts by a modest margin even as overall volume levels climbed to above-average levels. Specifically, about 19.6 million calls and 18.6 million puts changed hands on the session.

The uptick in call trading was felt at the CBOE, where the single-session equity put/call volume ratio fell to 0.60 — a two-week low. Meanwhile, the 10-day moving average slipped to 0.65.

Options traders zeroed in on bank earnings yesterday. Goldman Sachs (NYSE:GS) was flooded with activity alongside its largest post-earnings gap in years. Morgan Stanley (NYSE:MS) surged in sympathy but is falling pre-market after reporting disappointing earnings. Finally, Bank of America (NYSE:BAC) jumped over 7% after posting its own earnings beat.

Let’s take a closer look:

Goldman Sachs (GS)

Investment bank giant Goldman Sachs soared 9.5% yesterday giving a much-needed boost to the financial sector. Investors cheered its Q4 earnings performance. The company reported earnings of $6.04 per share on revenue of $8.08 billion. Both numbers bested analyst estimates.

The surge carried GS stock back above its 50-day moving average, officially reversing its short-term downtrend.

On the options trading front, traders came after calls with a vengeance. Activity swelled to 594% of the average daily volume, with 237,397 total contracts traded. 63% of the trading came from call options alone.

With the uncertainty of earnings now in the rearview mirror, implied volatility fell to 29%, placing it at the 34th percentile of its one-year range. Premiums are pricing in daily moves of $3.55, or 1.85%.

Morgan Stanley (MS)

Morgan Stanley rallied in sympathy to Goldman’s earnings beat, gaining 3.73% on the session. Unfortunately, the optimism proved premature. The company reported disappointing performance in its quarterly report this morning and is currently trading down 4.65% pre-market.

For the fourth quarter, Morgan Stanley garnered 80 cents in earnings per share on revenue of $8.55 billion. Analyst had been expecting the bank to earn 89 cents of earnings on $9.3 billion in revenue. The shortfall was due in part to poor performance from their Wall Street trading and wealth management divisions.

On the options trading front, calls were hot yesterday as traders jockeyed for position ahead of this morning’s report. Total activity climbed to 522%, with 174,766 total contracts traded. Calls contributed 60% to the day’s take.

Yesterday, implied volatility was at 33%, placing it at the 44th percentile of its one-year range. The expected earnings move was $1.96, or 4.4%, which makes today’s 4.65% gap only slightly larger than expected.

Bank of America (BAC)

Bank of America stepped up to the earnings plate alongside Goldman and scored big for shareholders. The company posted earnings of 70 cents per share, handily beating consensus estimates of 63 cents per share. By day’s end, BAC stock rallied 7.2% amid heavy trading.

With the surge, BAC’s year-to-date gains have grown to 15%, and the stock has now reclaimed almost all of 2018’s losses. Now that its daily trend is pointing higher, bullish trades are back on the table.

On the options trading front, calls ruled the roost. Total activity increased to 320% of the average daily volume, with 1,284,065 total contracts traded. Calls added 75% to the day’s tally.

Implied volatility dropped to 27% placing it at the 33rd percentile of its one-year range. Premiums are now pricing in daily moves of 48 cents or 1.7%.

As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.

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