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Banks reporting earnings this week, JP Morgan Chase & Co.

Jul 11, 2022

Bank Stock Earnings Preview: What to Expect?

By:Ryan Sullivan

Market Outlook Through the First Half of 2022

The S&P 500 E-mini is currently trading at $3,914, remaining under $4,000 since June 12th, 2022. Since mid-June the S&P 500 has shown us constructive price action. Based on recent price action, it is likely that the S&P 500 will move toward testing the $4,000 price level by the end of July.

Taking a broader view, the S&P 500 is currently down 17.97% from its opening price of 2022. At this point in 2022, with economic growth hurdles, supply chain constraints, rate hikes, and global conflicts known, it is becoming more likely that that market is currently trading at a price that has factored in most of the elements that have created the current bear market.

It seems that the known unknowns have been factored into the market and it will take new unknown unknowns to continue driving the overall market downward in the near term.

Fig. 1: Six-month price percent change chart for SPY, MS, WFC, C, and JPM.

Fig. 1: Six-month price percent change chart for SPY, MS, WFC, C, and JPM.

Bank Stock Earnings in July 2022

Next week, the second full week of July, will bring us four actionable bank stock earnings reports. They are JP Morgan Chase & Company (JPM) on July 14th, Morgan Stanley (MS) on July 14th, Citigroup Inc (C) on July 15th, and Wells Fargo & Company (WFC) on July 15th. Each of these stocks report earnings before the opening bell.

These four stocks make for good trading vehicles with high liquidity, tight bid-ask spreads, and high IV Ranks based on the tastyworks platform calculation. Presently, each of these stocks has an IV Rank above 45, which sets them up for good premium selling opportunities.

Wells Fargo (WFC) and Citigroup (C) are currently trading below $50, which gives us the opportunity to use undefined risk strategies that require a more reasonable amount of buying power, especially for someone with a smaller account size. Morgan Stanley (MS), currently trading between $70 and $80, also presents an opportunity to use undefined risk strategies for a nice premium to buying power ratio.

JP Morgan (JPM) is the only stock of these four that is trading above $100, currently trading at $114.63. JPM will require a larger amount of buying power for undefined risk strategies than the others, but it remains a nice opportunity for someone that has room in their portfolio.

Benefits of Trading Bank Stocks Going Into Earnings

Placing trades right before earnings reports gives us the opportunity to sell increased volatility going into an event that contains uncertainty. Ideally, for these events, earnings are reported, they match the consensus estimates, and the stock does not make a large move, remaining where the market has already priced the stock. Then, volatility diminishes, allowing us to buy our position back for a profit in a short period of time.

The upside to using this strategy for the banking sector is that bank stocks are often among the easiest to estimate earnings. Due to the nature of banking and the regulatory requirements that surround the banking industry, analysts often have access to much of the information that will affect earnings reports prior to the actual report. This allows for more accurate projections and accurate estimates per share. We can use this to our advantage.

However, it is always important to remember that earnings reports can come in as you expected them to, and the resulting price action can move exactly opposite to what you were looking for. It is common for larger market participants to exit large positions on positive earnings reports. Defining your risk going into earnings can alleviate some uncertainty.

Trade bank stocks, open an account on tastyworks!

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