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What the Options Market Says About Banks Ahead of Some Key Earnings

Jeff BishopJeff Bishop ·

Some banks are set to report earnings tomorrow, with JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc (NYSE: C) and Wells Fargo & Co (NYSE: WFC) kicking off earnings for the banking industry. Now, the options market could be a good indication of how these banks may perform after their earnings, so let’s take an indepth look into how the options traded today for these banks.

Options and Earnings

Some market pundits want you believing that there is a tell in the options market going into earnings. However, there is a lot of stuff going on. For example, calls can be sold to hedge long stock positions; puts can be bought to hedge long stock positions; stock can be sold and replaced by long calls (allowing the trader to enjoy the upside but limit their risk). As you can see, it’s not as simple as seeing calls/puts being bought/sold and coming up with a good read.

In any event, it pays to see what the options market is pricing the straddle at, as it can be used as a barometer for the type of volatility that can be expected on the earnings date.

Citigroup

The most active options in Citigroup Inc.were in the April 57.5 put strike, with over 11,500 options being traded. With that said, 60,000 puts and 55,000 calls traded on the day, with the majority of the flow being neutral.

Now, for the most part, option traders are not expecting much movement out of C. You see, over the last 8 quarters the median move in the stock has been 1.6%. The 4/13 $58.5 straddle is implying a 2.3% move for tomorrow.

Let’s look at some valuation ratios.

C has a price-to-earnings ratio of approximately 12.4. C has a price-to-revenue ratio of 2.4, and a forward price-to-revenue, based on next year’s revenues estimates, of approximately 2.3. C has a forward price-to-earnings ratio of around 11.2, based on next year’s earnings estimates. Moreover, it has a P/S of 2.6. Now, when compared to its industry, Citigroup may be slightly undervalued, but we’ll have to wait until tomorrow to see how its revenues and earnings grew.

Source: TradingView

JPMorgan Chase

JP Morgan Chase saw 2.3 times usual options volume on the day. The most active options on the day were the April 80 puts, with more than 10,500 being traded. That said, the majority of the sentiment was neutral. We saw over 86,000 puts and 82,000 calls trade on the day. Now, over the last 8 quarters JPM has had a median move of 1.5%. That being said the 4/13 85.5 straddle is implying a 2.1% move for tomorrow.

Moving on, let’s look at some of JPM’s valuation ratios.

JPM has a price-to-earnings ratio of 13.84. The company has a book value per share of 64.0. JPM has a price-to-revenue ratio of approximately 3.25. JPMorgan Chase & Co. has a forward price-to-earnings ratio of 13.03, based on next year’s earnings estimates. The stock has a forward price-to-revenue, based on next year’s revenues estimates, of 2.97. Now, the stock is slightly undervalued, in comparison to some of its peers, when looking at its price-to-earnings ratio and trailing 12-month price-to-sales ratio.

Source: TradingView

Wells Fargo

The option activity in Wells Fargo and Company was rather heavy, 2.3 times usual volume to be exact. The most active contract on the day was April 55 calls, with nearly 7,000 being traded. That said the majority of the sentiment in the options were neutral. A total of 102,000 options in the name traded today.

Surprisingly, of the three covered today, WFC has seen the least volatility over the last 8 quarters, with a median move of 0.8%. The 4/13 53 straddle is implying a 1.9% move for tomorrow.

WFC has a price-to-earnings ratio of 13.38. Based on next year’s earnings estimates, the stock has a forward price-to-earnings ratio of 12.7. WFC has a book value per share (BVPS) of 35.2, and therefore it had a P/B ratio of 1.50, which is slightly above the industry average of 1.1. WFC has a price-to-revenue ratio of approximately 3.1, and a forward price-to-revenue, based on next year’s revenues estimates, of 2.9.

Source: TradingView

Final Thoughts

The options market is implying that these stocks are going to move slightly more than it has historically, based on their median moves. Now, we’ll be watching these earnings tomorrow to get an indication of how the banking industry may perform.

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