A Big Ol’ Bullish Bet on Bank Earnings

Hey Traders,


It’s officially earnings season!


I recently told you how I prefer to play earnings — which is, I don’t much like to play them at all.


See, trading earnings is basically a crapshoot …


And I prefer to take a more skilled and much less risky approach, while still reaping many of the rewards that earnings traders enjoy.


More specifically, I don’t like paying the “pre-earnings premium tax,” because a lot of the time, that event-driven implied volatility (IV) being priced into the options is way too high — ultimately, the big reaction traders were expecting from the underlying stock just doesn’t pan out.


As such, I end up trading UP TO and JUST AFTER earnings, which helps take the directional guesswork out of the equation, AND usually allows me to ride the stock’s momentum at a relative bargain.


(Speaking of momentum, I hope to see you at 8 p.m. ET TONIGHT for my most important TED Talk of the year, where I’ll share how I make my OWN momentum, and give you my No. 1 option trade for 2021! Register right here and don’t be late!)


However, I understand that many option traders — including institutional investors — have no reservations about letting Lady Luck take the reins ahead of earnings  …


In fact, ahead of this week’s bout of big bank earnings, we spotted yet another mammoth option bet on the finance sectorand it’s clear in which direction the trader expects bank stocks to go this week


So today, let’s dive into the big ol’ bullish bet on bank earnings …


Big Money Sees Bank Earnings Blasting Off


As per usual, the financial sector will be first to take the earnings spotlight, and the quarterly reports should continue to flow in at a steady pace over the next few weeks.


JPMorgan Chase (Ticker: JPM), Goldman Sachs (Ticker: GS), and Wells Fargo (Ticker: WFC) reported earnings ahead of the bell today, and reports from Citigroup (Ticker: C), Morgan Stanley (Ticker: MS), Bank of America (Ticker: BAC), Charles Schwab (Ticker: SCHW), and U.S. Bancorp (Ticker: USB) should trickle in throughout the week.


After the first batch of earnings hit the Street today, so far the Financial Select Sector SPDR Fund (Ticker: XLF) is relatively flat.  


That may be bad news for one short-term option trader who opened a new XLF trade on Tuesday.


With the XLF trading just shy of $35 at the time, close to 20,000 35.50-strike call options expiring this Friday, April 16, were bought to open.



It looks like the calls were bought for 11 cents apiece, and since the options were more than 50 cents out of the money (OTM) at the time, that entire premium consists of extrinsic value.


Extrinsic value is essentially comprised of two elements:


        1. Time until expiration 
        2. Implied volatility


See, for all the newbies out there, the longer an option has until expiration, the more it’s going to cost.




Because that’s more time for the stock to potentially make a big move in the right direction!


The closer an option gets to its expiration date, the less time value it has — that’s called time decay, which speeds up every day.


So, with only days until expiration, the aforementioned 35.50-strike calls couldn’t have much time value priced in.


That means a lot of that 11-cent premium consisted of IV.


IV tends to inflate ahead of earnings, because these events are known potential catalysts to move the underlying shares. 


Obviously, the more volatile a stock (or ETF) is, the more likely it is to make that big, aggressive move in the right direction … so option buyers are willing to pay up for these contracts ahead of earnings.


But back to our big-league call buyer.


Ahead of today’s bank earnings, shares of XLF were trading just south of $35, and had recently springboarded off their 50-day simple moving average (SMA) to notch a record high of $35.14.


XLF with 50-day MA – courtesy of StockCharts


That means the XLF call buyer was expecting solid bank earnings to lift the exchange-traded fund (ETF) to a new all-time peak above the $35.50 strike price.


At last check, the trader’s predictions are falling short, with XLF slightly lower this morning.


Like I said, though, there are still plenty of banks waiting in the earnings wings before April 16 expiration, so anything can happen …


In the meantime, I’ll be over here focusing on the MAJOR MARKET SHIFT on the horizon — and at 8 p.m. ET TONIGHT, I’ll show you exactly how I plan to trade a market like we’ve never seen.

Make sure you’re there.

Your Only Option,



Mark Sebastian 

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