3 Bank Earnings to Watch Tomorrow – Schaeffers Research (blog)

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Third-quarter earning season is officially underway, with big-cap bank stocks JPMorgan (JPM) and Citigroup (C) trading modestly lower in the wake of this morning’s quarterly results. Next up are Bank of America Corp (NYSE:BAC), PNC Financial Services Group Inc (NYSE:PNC), and Wells Fargo & Co (NYSE:WFC), which are all slated to report earnings ahead of tomorrow’s open. Here’s a closer look at how BAC, PNC, and WFC have performed ahead of earnings, and how options traders have been positioning themselves on the financial shares.

BAC’s Weekly 10/13 Calls Popular Ahead of Earnings

After trading in a tight holding pattern from late March through August, BAC stock bounced near the site of its year-to-date breakeven mark in early September, finding its way to a nine-year peak of $26.30 last Friday, Oct. 6. Today, BAC stock is down 1.2% trade at $25.52 — finding support near its March highs — but maintaining a 15.5% year-to-date lead.

Despite Bank of America’s lackluster reaction to its recent earnings results, options traders have been betting on a post-earnings push higher in tomorrow’s trading. The stock’s weekly 10/13 26-strike call has seen the biggest rise in open interest over the past 10 days, with nearly 45,000 contracts added. Data from the major options exchanges confirms mostly buy-to-open activity, meaning traders think BAC shares will settle north of $26 at tomorrow’s close, when the series expires.

Looking back over the past eight quarters, shares of BAC have closed higher in the session subsequent to reporting five times, though the two most recent quarters have resulted in negative earnings reactions. Overall, the stock has averaged a single-session post-earnings move of 1.2%, with the options market pricing in a bigger 2.1% swing this time around.

PNC Stock Hits a Record High Ahead of Earnings

PNC shares hit a record high of $137.41 earlier, and were last seen fractionally lower at $136.47. Today’s milestone comes after the bank stock took a sharp bounce off its 40-week moving average in early September — a trendline that served as resistance in 2016, but now appears to have switched to a more supportive role. The shares are boasting a 17% year-to-date gain, but could be poised to pare a bigger portion of this return tomorrow, if past is precedent.

In fact, over the past eight quarters, PNC stock has closed lower in the session after earnings six times — including the two most recent quarters — averaging a loss of 0.9%. Plus, the equity’s 14-day Relative Strength Index (RSI) has edged into overbought territory, last seen at 70.15, suggesting a steeper pullback may be in the cards.

Nevertheless, it looks like options traders are betting the stock at least holds above the $130 mark in the near term. Peak front-month put open interest for PNC is found at the October 130 strike, and data from Trade-Alert suggests the bulk of the activity has been of the sell-to-open kind. However, these put writers may also be looking to capitalize on a post-earnings volatility crush.

Wells Fargo Call Buying Has Been Hot

After breaching the round $50 mark in early September, Wells Fargo shares rose along with their sector peers — tacking on more than 12%. This rally has since stalled in the $55.80 region, a roughly 61.8% Fibonacci retracement of the stock’s 2015 rally. Just above here is the $56-$56.50 neighborhood, home to WFC’s summer highs and a 61.8% retracement of its post-election surge. At last check, the equity was down 0.3% at $55.50.

Historically speaking, Wells Fargo stock has reacted negatively to the bank’s earnings report more times than not over the past two years — with the shares closing lower in the session after earnings in seven of the last eight quarters. In the past two quarters alone, the equity has averaged a single-session post-earnings loss of 2.2%. For tomorrow’s trading, the options market is pricing in a post-earnings move of 2.6%, regardless of direction.

Speculative players, it seems, are betting on the action to resolve to the upside. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Wells Fargo options traders have bought to open 21,238 calls and 10,354 puts in the last two weeks. The resultant call/put volume ratio of 2.05 ranks higher than 89% of comparable readings, pointing to an unusual appetite for bullish bets over bearish.