A less risky way to bet on Morgan Stanley’s upcoming earnings will send the stock to new highs
As we enter another earnings season, banks are giving us a preview of what’s to come. Among the big banks reporting early in the season, Morgan Stanley stands out as a standout performer that could continue its rally toward all-time highs on the strength of its wealth management operations. Let’s start with the longer-term chart of Morgan Stanley (MS), which reported on July 16. We see that the company recently broke above key resistance at $100 that has held since 2023, making the all-time high at $109 a reasonable upside target. And 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, with earnings as the catalyst. Morgan Stanley has been investing in building its asset management business for years, and it now accounts for more than 51% of its revenue. With asset prices continuing to rise as inflation continues to trend in the right direction, fees from this division could provide a significant boost to another earnings beat. Trading at 1.8 times book value, MS is trading at the high end of its historical valuation. However, recent dividend increases and a $20 billion share buyback program point to a strong financial outlook. Trading With low implied volatility, options on Morgan Stanley are relatively cheap. To capitalize on the upside, I am buying the Aug 16 Vertical Call at $105/$110 with a $1.27 discount. This involves: Buying the August Vertical $105 Call for $1.98 Selling the August Vertical $110 Call for $0.71 Using the vertical option 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 write-down paid. The maximum potential profit is $373 per contract if MS is above $110 at expiration, providing an attractive risk/reward. This strategy takes advantage of relatively low option premiums due to the low IV Rating, which is consistent with our bullish fundamental and technical thesis on Morgan Stanley. DISCLOSURE: (None) All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent companies or their affiliates and may have been previously disseminated by them on television, radio, the internet or other media. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED AS FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO PURCHASE ANY SECURITIES OR OTHER FINANCIAL ASSETS. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE CONTENT MAY NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISION, YOU SHOULD CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here to view full disclosure statement
