Earnings season is upon us, and investors are prepping for a deluge of company updates across the land. Since bank stocks will be the first to step up to the plate, we’re focusing on financials for this week’s top stock trades.
Share prices soared in the second quarter, with the S&P 500 gaining 8% for the three-month period. If we lengthen the lookback period another quarter, stocks put up their best performance for the first half of the year in more than two decades. Banks have been caught up in the euphoria, with some components exceeding even the lofty gains of the broader market.
Normally, I’m leery of placing trades ahead of quarterly reports due to the elevated volatility. But my concern doesn’t really apply to bank stocks. They rarely gap, and when they do, the percentage move is minimal. So here are three companies worth buying ahead of earnings.
Let’s take a closer look at each chart, and build an options trade to play.
Top Stock Trades: JPMorgan Chase (JPM)
We’re starting with the best in breed, JPMorgan. If I had penned this two trading sessions ago, I would have been bearish. But a lot has changed since then. JPM stock carved out a higher pivot low with Friday’s surge and followed through with another 1.35% gain on Monday. The ramp is carrying prices into overhead resistance at the 50-day moving average. One more push will officially reverse the daily trend back up and spell the end of the stock’s correction.
The timing of the ramp directly in front of Tuesday’s earnings report says something about investor optimism surrounding bank earnings. From a charting perspective, JPM has a clear runway to $167.44 if this breakout bid succeeds.
I’m inclined to believe it will. Implied volatility hasn’t lifted at all and suggests traders are extremely complacent heading into the event. So even if we gap lower, I suspect buyers will be quick to enter.
The Trade: Buy the August $160/$170 bull call for $2.91.
The max risk is $2.91, and the max reward is $7.09.
Ally Financial (ALLY)
Given its sector sympathies, it should come as no surprise that Ally stock looks similar to JPM. Last month’s sharp correction delivered a buying opportunity that now seems to be bearing fruit. Last Thursday’s failed support break trapped bears and is resulting in a nice squeeze higher. In technical analysis kindergarten, I learned that “from failed moves come fast moves.” This is just such an example.
Before last month’s hiccup, ALLY stock was one of the most consistent uptrending players in the banking space. If it can recapture the magic, big gains could be in store. Monday’s breakout attempt was solid and should lead to more upside. However, if you want to wait for a break above the 50-day moving average for further confirmation, do so.
Like JPM, ALLY has really low implied volatility. I like bull call diagonal spreads.
The Trade: Buy the September $50 call, sell the August $55 call for a net debit of $2.75.
The max risk is $2.75. Consider shooting for a profit of $1 to $1.50 per spread.
Top Stock Trades: Financial Sector (XLF)
Our final top stock trade offers a diversified route to playing strength’s return to banks. Instead of going with a single player, how about buying the whole sector via the Financial Sector exchange-traded fund, XLF? Like its predecessors, XLF carved out a higher pivot low last Thursday and is now testing overhead resistance at a prior pivot and the 50-day moving average.
A breakout could set the stage for a return to its peak at $38.60.
The cheaper price tag makes me favor another call diagonal spread.
The Trade: Buy the September $35 call while selling the August $38 call for a net debit of $2.07
The max risk is $2.07. If XLF climbs to $38 or higher near expiration, you will capture a gain nearing $1.00 per spread.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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