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Big Option Trade In JPMorgan Ahead Of Tuesday's Earnings

Wayne Duggan

JPMorgan Chase & Co. (NYSE: JPM) shares traded lower by 1.1% on Monday ahead of the company’s second-quarter earnings report expected out Tuesday morning, but at least one large option trader is betting the Citigroup Inc (NYSE: C) earnings beat is a good omen for JPMorgan.

The Trade

On Monday, Benzinga Pro subscribers received an options alert related to a massive JPMorgan option trade.

At 11:37 a.m. ET, a trader sold 5,000 JPMorgan put options with a $100 strike price expiring on June 19, 2020 at the bid price of $3.951. The trade represented a bullish bet worth $1.975 million that JPMorgan shares will be trading above $96.05 in roughly a year’s time.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the large size of the JPMorgan options trades, traders should be aware that it could potentially be a hedge on a bearish JPMorgan earnings bet.

Earnings Beat Imminent?

Monday’s option trader may expect JPMorgan to follow in Citigroup’s footsteps and report an earnings beat on Tuesday morning. Given that the expiration date on the puts sold isn’t for another year, however, the trade may not simply be a bet on earnings. Instead, the Citigroup beat may have led the option seller to simply throw in the towel on a longer-term bearish thesis on big U.S. banks.

Given the break-even price for the puts sold is $96.05, about 15.6% below Monday’s trading price, the sale isn’t necessarily an extremely bullish play.

Stock traders will be watching the option market closely throughout the next couple of days for additional insight into big bank earnings. JPMorgan, Wells Fargo & Co (NYSE: WFC) and Goldman Sachs Group Inc (NYSE: GS) are expected to report on Tuesday. Bank of America Corp (NYSE: BAC) is expected to report on Wednesday and Morgan Stanley (NYSE: MS) is expected to report on Thursday.

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