Earnings Volatility: Bank of America's Post Earnings Move Edge Higher as Treasury Yields Fluctuate
Stock prices may see larger-than-normal moves during earnings season, making it a potentially attractive time for options traders. For investors looking to trade against these moves, you should always keep track of how the options might shift after their earnings. Here are the top earnings and volatility for the week:
-Earnings Date: 1/12 Before market open
-Implied Move: 3.8%
-Absolute Average Actual Move for the past 4 Quarters: 2.4%
-Absolute Average Actual Move for the past 12 Quarters: 2.5%
-Earnings Normalized Estimate: USD $0.611
-Revenue Estimate: USD 16.11 billion
According to recent data from Market Chameleon, options for Bank of America are overvalued with the implied move of 3.8% higher than the average actual move for the past 4 quarters (2.4%) and its average actual move for the past 12 quarters(2.5%). The options market overestimated BAC stocks earnings move 62% of the time in the last 13 quarters. The predicted move after earnings announcement was ±4.1% on average vs an average of the actual earnings moves of 2.7% (in absolute terms).
Calls are outnumbering puts ~1.82:1, with the 2024 Jan 12 34 call leading the way (volume is 12,828). The option contract with the highest open interest was 2024 June 15 puts with 212,018 openning contracts.
Earnings Catalyst
The week will close with several bank and financial services companies starting the first earnings seasons of 2024 from $JPMorgan (JPM.US)$ , $Wells Fargo & Co (WFC.US)$, $Bank of America (BAC.US)$ , $Blackrock (BLK.US)$ , and $Citigroup (C.US)$ to kick off fourth quarter earnings season.
For Bank of America, the biggest questions remain its exposure to underwater bonds purchased when interest rates were low. A related question is what to expect from net interest income and expenses this year," CNBC banks reporter Hugh Son says.
Investor's attention will be focused primarily on the impact of the sharp decline in interest rates during the quarter, the level (and breadth) of credit quality deterioration as well as updates to 2024 guidance in light of more benign rate and GDP expectations, according to Sean Ryan, VP/Director for the banking and specialty finance sector at FactSet.
The 10-year Treasury yield declined by 69bp in 4Q23, benefiting bank capital levels. However, some banks restructured their bond books, which may result in losses. Although the decline also suggests an end to increasing funding costs, deposit pricing lags may continue to pressure net interest margin until 2024.
Analysts of Factsets are predicting earnings growth rates of 2.4%, 5.6%, 0.6%, and 24.2% for Q1 2024 through Q4 2024 for the Financials sector.
It seems the big banks are feeling the squeeze on net interest income, it is having a negative effect on revenues and forward guidance in this group," said Brian Mulberry, client portfolio manager at Zacks Investment Management. "Lack of loan demand, lack of M&A activity and very little IPO business is hurting the more profitable activities of the larger banks in addition to paying out 5% to money market depositors."
Don't Get Crushed by Earnings. Here are things you should know before considering a trade.
Knowing the IV Crush
Before significant corporate events such as earnings announcements, product launches, or clinical trial results, implied volatility tends to increase. However, after the news has been released, the implied volatility can drop significantly due to the sudden clarity in the market and the stock price reaction to the news. This phenomenon is referred to as IV crush.
IV Crush And Option Prices
IV crush can lead to a decrease in option prices because the Implied volatility is lowered dramatically. This decrease in option prices due to IV crush can be a risk for options traders who have purchased options at a higher price with the expectation of making a profit from a significant move in the underlying stock price. Conversely, IV crush may not be as prevalent if the option is undervalued and the stock price moves drastically, which can pose a risk for option sellers. It's important for traders to be aware of IV crush and factor it into their trading strategy when considering options trades around significant corporate events.
Not all options are affected equally by an IV crush. IV crush affects short-term option prices more than long-term option prices.
Nonetheless, it's important to note that trading options always involve risks, and investors should consult with a financial advisor before making any trades.
Source: Dow Jones, Market Chameleon, Bloomberg
Disclaimer:
Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request. Moomoo does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.
The data and information provided has been obtained from sources considered to be reliable, but Moomoo Financial and its affiliates do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
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FearGreed : Nice summary!
HendrixG :