How Much Will Bank Stocks Move On Earnings? Draw Estimates With Option Prices

Earnings season kicks off this week with banks starting to report earnings on Friday before the market opens.

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We have Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and First Republic Bank (FRC) all due to report on Friday.

It is shaping up to be a busy week and could give traders an early indicator of how this earnings season will measure up.

Those who are wondering what sort of moves to expect in bank stocks can use the options market to gain an insight into the market expectations.

Calculating Expected Move

We can use what is called the expected move. This tells us the market’s expected range for an underlying stock for a specific period.

The quickest way to work out the expected move is to look up the stock’s option chain and add together the price of the at-the-money put option and the at-the-money call option. We use the first expiry date after the earnings date.

While this approach isn’t as accurate as a detailed calculation, it does serve as a reasonably accurate estimate.

Bank Stocks’ Expected Moves

Citigroup options are pricing in a 4.90% move. Citi stock has stayed within the expected range five out of the last six reports.

Bank of America stock options are also implying a 4.90% move. BAC stock has stayed within the expected range four out of the last six times.

JPMorgan stock options indicate an expected move of around 3.80%. The stock has stayed within the expected range four out of the last six reports. Five of the last six post-earnings moves have been to the downside.

Option traders in Wells Fargo stock expect slightly bigger moves, with the range expected to be around 5%. WFC stock has stayed within the expected range four out of the last six times.

First Republic options are pricing in a 5.90% move. FRC stock has stayed within the expected range four out of the last six times.

Good luck this week, traders.

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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