As we begin another earnings season, banks will give us a preview of what’s ahead. Among the major banks reporting earnings at the start of the quarter, Morgan Stanley stood out, with the bank expected to continue its bullish run towards a record high on the strength of its wealth management business. Let’s start with the long-term chart from Morgan Stanley’s (MS) July 16 report. as a reasonable upside target. If we zoom in, we see that MS recently rose to key resistance at $103. A break above this level would be a clear bullish signal and earnings would act as a catalyst. Morgan Stanley has invested over the years to build up its wealth management business, which now accounts for more than 51% of its revenue. As inflation continues to move in the right direction and asset prices continue to rise, the sector’s fees could provide a significant boost to earnings again. MS’s price-to-earnings ratio is 1.8x, which is at the upper end of its historical valuation. However, the company’s recent dividend hike and $20 billion stock repurchase program point to its strong financial outlook. Morgan Stanley’s options are relatively cheap due to low implied volatility. To take advantage of the bullish outlook, I bought the August 16 $105/$110 call vertical option with a debit price of $1.27. This requires: Buying the August $105 call for $1.98 Selling the August $110 call for $0.71 Using the call vertical spread allows us to participate in the upside potential while limiting our risk. The total risk on this trade is $127 per contract, which is the initial debit paid. If MS is above $110 at expiration, the maximum potential gain per contract is $373, providing an attractive risk/reward ratio. This strategy takes advantage of the relatively low selection premium due to the lower IV rating, which is consistent with our bullish technical and fundamental view on Morgan Stanley. Disclosure: (None) All opinions expressed by CNBC Pro contributors are theirs alone and do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent company or affiliates, and may have been previously published by them on television, radio, the Internet or spread on other media. The above is subject to our Terms and Conditions and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not apply to your particular situation. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. Click here to view the complete disclaimer.
