Earnings season kicks off this week. The banks have captured the pole position for the start as we wait to hear how the holidays played out and the impact of the ongoing U.S.-China Trade War negotiations/deal. I'm not sure if I'd call banks an upgrade or a downgrade to the old-school Alcoa (AA) earnings. The reports are complex, muddled, and often don't result in much action in the underlying stocks or the overall market. They provide a slight temperature gauge on the initial market reaction to headline numbers, but that's about it as far as I see it.
The option's market is currently pricing in a 2.9% move through Friday of this week. Historically, the stock has moved greater than 2.9% intraday the first day of trading after earnings are released, but rarely does it close with a move greater than 2.9%. In fact, seven of the past nine reports have experienced intraday moves greater than 2.9%, but only one close above 3.01% on the day. And if we fast-forward to three days post-earnings, the stock has only experienced a move about 2.8% three of the past 10 reports. If you are buying volatility, be ready to close intraday tomorrow if the stock ticks above a 3% move, and if you are short volatility then be patient.
The option's market pricing of a 3.1% move is reflective of the slightly higher volatile moves post-earnings in Citi. The stock has moved greater than 3% intraday six of the nine reports, but interestingly enough the past three reports have been more subdued failing to hit that 3% level. When we only examine a closing number, the stock has only once experienced a closing change greater than 3.1% in the past two years. The outlook is similar for three days post-earnings, so this resembles Wells Fargo when measured on a closing basis only.
The option's market is pricing a 2.9% on JPM. This stock has experienced an intraday volatility that is the most mixed of the three names. Over the past nine reports, three times we've seen good-sized moves above the 2.9% level with the other six being lower. Unlike Citi, two of the past three reports have been larger while the previous six more subdued. It's as if the Citi active traders moved over to JP Morgan less than a year ago.
One alternative traders might be considering is playing the volatility in the Financial Select SPDR (XLF) , the ETF play on financials encompassing all three names. XLF is only pricing a 1.75% change through this Friday's expiration, and while that may seem cheap, traders have to consider the offset potential of these three banks.
I examined all three names to see if they moved together. If so, then a long vol trade on XLF would be a no-brainer. Unfortunately, the market is not that kind. Over the past six reports, only once did all three stocks rise together, and only once did they all fall together. Another two times, we saw one up, one down, and one changed, while the other two times we saw two up and one down. The real kicker is only one time did we see a net (avg) move of 2% across all three.
JPM does outweigh Citi and WFC by a factor of two to one, but even when we adjust for the larger weight, we still only have a single instance where the influence of these three equaled more than 1.75%. That's not to say XLF can't move more than 1.75% without these names, but given they equal 25% of the ETF you'd want to see more as a trader to buy volatility into the report.
In the end, I'd only consider a volatility trade on JP Morgan, and I'd caution the Wells Fargo bulls that the technical picture is horrendous on the daily chart into earnings, so I'd expect sellers to hit any pop tomorrow. Overall, these are names I'd prefer to watch, but if you insist on trading them, a recent history merits a look.