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Morgan Stanley Bulls Gamble on Quick Post-Earnings Gains


MS call buyers target the soon-to-expire October 28.50 strike,

Options traders are gambling on a post-earnings pop for Morgan Stanley (NYSE:MS) today, as calls are being picked up at a rapid-fire rate. Specifically, 22,000 calls have crossed the tape thus far, which is more than double the intraday norm. By comparison, 14,000 puts have been exchanged.

The majority of the call traders -- looking to place last-minute bets ahead MS' earnings release tomorrow morning -- are flocking to the soon-to-expire October 28.50 strike. Here, more than 8,100 contracts have changed hands at a volume-weighted average price (VWAP) of $0.41. About half of the contracts went off at the ask price, implied volatility has ticked 12.6 percentage points higher, and volume exceeds current open interest levels -- collectively inferring long call positions are being initiated here. In addition, data from the International Securities Exchange (ISE) confirms some buy-to-open activity.

In order for these trades to be profitable, MS -- perched at $28.75 -- has to step just 0.6% to the north, in order to finish atop the breakeven rail of $28.91 (strike price plus the VWAP) by the sound of tomorrow's closing bell, when the options expire. As of now, the options have a 59% chance of staying in the money through expiration, according to their current delta of 0.59. Should MS stumble back below the $28.50 level over the next session and a half, the call buyers will risk losing the premium paid per contract.

Meanwhile, as a number of October 28.50 call players bet on extended gains through tomorrow's close, one trader may be anticipating a post-earnings slip up for MS, considering last year, the stock tumbled 3.8% the day after its third-quarter announcement. This trader appears to have sold to open a block of 2,845 contracts at the aforementioned strike, in hopes that MS finishes below the 28.50 strike at expiration. Then, the contracts will expire worthless, and the seller can pocket the initial net credit. This trade crossed the tape early this morning, when MS was parked below the strike price.

Heading into tomorrow morning's earnings report, Morgan Stanley is sporting a year-to-date gain of 50.4%. On average, the stock has seen additional upside of about 0.7% the day following the release of its quarterly report. Plus, MS has topped analysts' consensus bottom-line estimates in five of the last eight sessions. Of note, for the third quarter, analysts are calling for a per-share profit of 40 cents.

This article by Milissa Hudepohl was originally published on Schaeffer's Investment Research.

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