To The Moon

With major banks like Citigroup, Wells Fargo, Goldman Sachs, and JPMorgan set to release earnings on January 15, followed by Morgan Stanley and Bank of America on January 16, the stage is set for pivotal market movements. Let’s break this down and discuss two high-probability trading ideas.

Understanding the Earnings Context

Earnings reports reveal how well a company has performed over the past quarter. For banks, these reports often include metrics like net interest income (how much banks earn from loans minus what they pay on deposits), trading revenue, and loan loss provisions. The big banks also provide forward guidance, offering insights into future profitability. Given their size and interconnectedness, their earnings can set the tone for the broader market.

Why do earnings matter for options trading? Because earnings announcements are often accompanied by significant price volatility. By analysing expectations and positioning ahead of time, traders can design strategies to profit from these movements.

Key Themes for the Banking Sector

1. Interest Rates and Net Interest Margins (NIM): With the Federal Reserve holding rates at elevated levels, banks’ NIMs have likely remained robust. However, higher rates can also deter loan growth.

2. Trading Revenue: Market volatility in Q4 2024 likely boosted trading desks at Goldman Sachs and Morgan Stanley.

3. Loan Loss Provisions: Rising consumer delinquencies and corporate defaults may weigh on results, particularly for banks with large retail portfolios like Wells Fargo and Citigroup.

4. Regulatory Pressures: Heightened scrutiny could lead to increased compliance costs.

Trading Ideas

Trade Idea 1: Iron Condor on $JPMorgan Chase(JPM)$

Why JPMorgan? JPMorgan’s diverse business lines—from retail banking to investment banking and asset management—make it a bellwether for the financial sector. With CEO Jamie Dimon’s forward guidance often shaping investor sentiment, JPM is a prime candidate for a volatility-based strategy.

Strategy: An iron condor is a neutral options strategy that profits if the stock stays within a specific range. Here’s how I would set it up:

• Sell a January 17 $250 call and $230 put (at-the-money options for high premiums).

• Buy a January 17 $255 call and $225 put (to limit risk).

Rationale:

• Implied volatility (IV) typically spikes before earnings, inflating options premiums.

• JPMorgan’s historical post-earnings price movement often stays within a 5-7% range.

• Setting strikes just outside this expected range increase the probability of profit.

Risk-Reward:

• Maximum profit: Net credit received.

• Maximum loss: Difference between strikes minus the credit.

• Probability of profit (POP): High (70-80%) if the stock remains within the range.

Trade Idea 2: Bull Put Spread on $Morgan Stanley(MS)$

Why Morgan Stanley? Morgan Stanley’s strength lies in wealth management and trading. With Q4’s market volatility, trading revenue is expected to shine. Additionally, its focus on fee-based wealth management provides steady income.

Strategy: A bull put spread is a bullish strategy that profits if the stock rises or remains flat. Here’s how I would structure it:

• Sell a January 17 $120 put.

• Buy a January 17 $115 put (to cap downside risk).

Rationale:

• Morgan Stanley’s earnings are likely to exceed expectations due to strong trading revenue.

• Selling puts takes advantage of elevated IV, while buying a lower-strike put limits risk.

Risk-Reward:

• Maximum profit: Net credit received.

• Maximum loss: Difference between strikes minus the credit.

• POP: High (75-85%) if MS stays above $120.

Optimistic or Cautious?

While I’m cautiously optimistic about the banks’ earnings, I’m aware of potential headwinds. Elevated loan loss provisions and regulatory costs could dampen enthusiasm, but robust NIMs and trading revenue should provide a buffer. Ultimately, I expect earnings to set a cautiously positive tone for the season.

Key Takeaways

• Earnings season is a prime opportunity to deploy options strategies tailored to volatility and directional bias.

• An iron condor on JPMorgan leverages elevated IV and historical price stability.

• A bull put spread on Morgan Stanley capitalizes on strong earnings expectations with limited downside risk.

By focusing on high-probability setups and managing risk effectively, we are positioning to profit regardless of the market’s ultimate reaction to bank earnings. Let’s see if the big banks can deliver the spark the market needs to kickstart 2025.

Please DYODD.