By Katie Coburn / October 16, 2017 / www.schaeffersresearch.com /
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Third-quarter earnings season is ramping up this week, with big banks Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) slated to report earnings tomorrow morning. Here's a closer look at how GS and MS have performed ahead of earnings -- and after past earnings reports -- and how options traders have been positioning themselves on the financial shares.
Options Players Are Betting On A Post-Earnings Spike for GS Shares
Afterhitting a record high of $255.15 on March 1, Goldman Sachs shares retreated to test support in the $210-$215 area. However, GS stock has surged 7.5% in just the past month, and is back in the black year-to-date, last seen up 1.4% at $241.77. The investment stock could be vulnerable to another retreat tomorrow, however, if past is prologue.
Over the past eight quarters, shares of GS have moved lower the day after five of the firm's last eight earnings reports. On average, the equity has moved 2.3% the day after, regardless of direction. This time around, the options market is pricing in a bigger-than-usual one-day swing of 3.5%, based on the stock's at-the-money (ATM) implied volatility (IV) data.
Options traders are disregarding Goldman's recent earnings history -- as well as last week's spat of relatively lackluster
bank earnings -- and betting on a move higher for GS stock tomorrow, as evidenced by the equity's 10-day call/put volume ratio of 1.94 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio sits in the 83rd annual percentile, indicating traders have bought to open calls relative to puts at an unusually fast pace in recent weeks.
Lucky for these optimistic options buyers, GS stock has tended to exceed options traders' volatility expectations during the past year, which we know from its lofty Schaffer's Volatility Scorecard (SVS) of 88.
Morgan Stanley Call Open Interest Elevated Ahead of Earnings
Morgan Stanley stock was last seen trading at $48.62, up 0.7%. The banking security has embarked on a series of higher high and lows since March, a pattern which led to its eight-year high of $50.14 on Oct. 6. Now boasting a roughly 15% year-to-date lead, MS stock could be poised for another move higher, if past is precedent.
Historically, MS shares moved higher the day after the company's last two earnings reports. For tomorrow's trading, the options market is pricing a post-earnings move of 4.5% -- more than double the security's average single-session post-earnings move of 2.2% from the past eight reports -- per ATM IV data. A 4.5% swing higher would propel MS shares to a fresh eight-year high around $50.81.
Short-term options traders are more call-heavy than usual ahead of the earnings event. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.93 stands higher than just 24% of all other reading from the past year. In other words, near-term options traders have rarely been more call-biased during the past 12 months.
Fortunately, MS shares haven't disappointed premium buyers during the past year, as evidenced by its SVS of 85 -- which suggests the stock has consistently exceeded the options market's volatility expectations.