JPMorgan Chase (JPM) reported earnings this morning before the markets opened that was 39% higher than a year ago and 42 cents better than analyst estimates. Its shares are up more than 3% on the news.
Two other big banks reporting this morning were Wells Fargo (WFC) and Citigroup (C).
Wells Fargo’s earnings per share jumped 72% year-over-year to $1.48, while Citigroup’s EPS was flat over last year at $1.63. However, Citi beat the consensus estimate by 40 cents. Analysts felt its earnings would fall by nearly 25% in the quarter. Both of their stocks were up 2-3% in Friday trading.
Over in the options market, quite a few contracts from the banking trio are unusually active. I like three in particular.
It’s time to take some profits to the bank (I couldn’t resist)!
Have a great weekend!
JPMorgan Chase
Of the three, I’d say Jamie Dimon’s bank is the best to own for the long haul. Shareholders have done well with him in the top job. JPM stock is up 278% since he became CEO on Dec. 31, 2005. That compares to 242% for the S&P 500.
I thought the spread would have been higher than 36 percentage points. Throw in the dividends, and it’s a better total return.
As I look at JPM’s unusual options activity on Friday, I see four options with volumes at least 5x the open interest, with three puts and one call. I’m only using options expiring next Friday or later. I’m not touching 0DTEs (zero days to expiration).
While I like the Oct. 27 $150 put, the Nov. 17 $165 call is more intriguing.
How so?
With an ask price of $0.25, as I write this, you’re making a downpayment of 0.2% of the strike price. Sure, there are only 35 days to expiration for the shares to increase by $15, but the delta of .06308 means the shares only have to rise by $3.96 for you to double your money on the call.
Which do you think is more likely to happen? The shares will jump by 10% in five weeks, or 2.6%. I’d say the latter.
For $25, you get an excellent risk/reward proposition.
That said, the Oct. 27 $150 put provides an annualized yield of 39%. Should it move higher, you get to pocket $234. If it drops in value, you’re not losing money until it falls to $147.66.
Given the kind of year JPMorgan has going, I find that hard to imagine, but the problems in Israel suggest anything’s possible right now.
Wells Fargo
Wells Fargo is back from the dead. Its earnings were 23 cents better than analyst expectations. Its revenue, excluding interest expense, was $20.86 billion, $650 million higher than the consensus.
One only needs to look at a year-over-year comparison of its non-interest expenses to understand why profits increased. They fell by 8.3% in Q3 2023. It finished the third quarter with a Common Equity Tier 1 ratio of 11.0%, 210 basis points higher than its new regulatory minimum with buffers.
Like Dimon, CEO Charlie Scharf did say the bank was noticing a slowdown in the economy. This is something to keep in mind as you consider options’ plays.
Wells Fargo’s options aren’t nearly as busy. That probably indicates investor uncertainty about the bank’s ability to compete with JPMorgan and the other big banks.
There are few homerun positions based on its unusually active options for Friday. However, the Oct. 20 $40.50 put has a bid price of $0.49. That translates into a 63% annualized yield if you sell the put. Currently, out of the money by 52 cents, it’s a coin toss whether or not the shares will be put to you.
The bank’s shares have underperformed for years, so it’s an excellent entry point if you can hold for the long term. If the shares increase over the next week, you pocket $49.
Citigroup
Citigroup stock is down nearly 8% year-to-date, 592 basis points worse than WFC, and more than 18 percentage points worse than JPM on a relative basis.
The bank’s revenue in the third quarter was $20.1 billion, nearly 9% higher than a year ago. I discussed its earnings in the intro. While flat, they were considerably higher than what the analysts were modeling.
Citigroup’s CET1 was 13.5%, 10 basis points higher than Q2 2023 and 120 higher than Q3 2022. Further, it was just 80 basis points less than JPMorgan.
“Despite the headwinds, our five core, interconnected businesses each posted revenue growth resulting in overall growth of 9%. Services, our fastest growing business, grew by 13% with Treasury and Trade Solutions having its best quarter in a decade,” stated CEO Jane Fraser.
Citi’s stock looks much more attractive than Wells Fargo's.
As for unusual options activity, there’s not much when it comes to longer DTEs. The longest is the Nov. 10 $44 call. With one month to expiry, you can secure the right to buy 100 shares for 1.3% of its strike price. That’s very reasonable.
So, with a $0.55 ask price, the shares must appreciate to $44.55, or 5.7%, over the next month to tempt you to exercise your right to buy them at $44. However, if the share price increases by 90 cents over the next month, you’ll generate a 50% return if you sell it before Nov. 10.
It’s not a homerun play, but it’s a solid single.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
