BAC, GS Options Traders Bet on Earnings Upside – Schaeffers Research (blog)

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Financial sector earnings are in full swing, and while investment firm BlackRock reported this morning, quarterly results from big banks Bank of America Corp (NYSE:BAC) and Goldman Sachs Group Inc (NYSE:GS) are due tomorrow morning. Despite a relatively lackluster showing from sector peers JPMorgan Chase, Citigroup, and Wells Fargo, options traders have been betting on a positive earnings reaction for both BAC and GS.

BAC Stock Targeted for Risky Options Trade Ahead of Earnings

In Bank of America’s options pits, speculative players have targeted the stock’s July 24 call, which is home to peak front-month open interest of 214,274 contracts. Data from the major options exchanges confirms significant buy-to-open activity here in recent months, with vanilla call buyers expecting BAC shares to be sitting north of $24 at this Friday’s close, when the options expire.

Today, one options bull today is taking a riskier approach to their positioning on BAC. According to data from the International Securities Exchange (ISE), it looks like a speculator initiated a 2:1 call ratio spread in the front-month series — selling to open 20,000 July 25 calls, while simultaneously buying to open 10,000 July 24.50 calls.

If this is the case, the goal is for BAC to settle right at $25 at week’s end. While risk to the downside could be quite significant, it’s theoretically unlimited to the upside due to the naked sold call. However, this trader may also be looking to profit on a post-earnings volatility crush for BAC.

At last check, Bank of America stock was trading down 0.5% at $24.09, but finding support at the formerly resistant $24 level, which is also home to its rising 20-day moving average. BAC stock has a history of positive earnings reactions, gaining ground in the session subsequent to reporting six of the past eight quarters. Overall, the security has averaged a single-session post-earnings move of 1.6%, with the options market pricing in a bigger 3.6% swing for tomorrow’s trading.

Pre-Earnings Options Traders Buy Calls on Goldman Sachs Stock

Call buying has been more popular than usual in GS’ options pits recently. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 36,312 calls over the past 10 sessions, compared to 14,321 puts. The resultant call/put volume ratio of 2.54 ranks in the elevated 88th annual percentile.

While peak open interest for GS is found at the September 250 call — home to 11,003 contracts — the 250 strike is also site of peak front-month call open interest of 9,509 contracts. Data from the major options exchanges confirms the bulk of this activity has been of the buy-to-open kind. A breakout above $250 would have Goldman Sachs trading back near its March 1 record high of $255.15.

At last check, though, GS shares were trading down 0.2% today at $228.05. If history is any guide, the stock could be retesting its 200-day moving average in tomorrow’s trading — a trendline that contained the security’s June pullbacks. Goldman Sachs shares have traded lower in the session subsequent to reporting five of the past eight quarters, including a 4.7% drop in April.