On Friday morning, Morgan Stanley released fourth quarter earnings that sent the stock soaring 7.9%. Earnings per share came in at $0.45 versus the $0.27 expected, and revenue increased by 23% to $6.97 billion.
The report and conference call were bullish from many standpoints, and encouraged option traders to step into long positions in the stock.
One of the biggest trades of the day was the purchase of 29,400 April 24 calls for $0.70 each, which was done with the stock at $22.30. This is a bullish bet that MS will be above $24.70, or 11% higher, at April expiration.
Morgan Stanley finally looks to be done cleaning house, and can now focus on running its business as normal.
CEO James Gorman has said that the dirty work is done, meaning that the layoffs are over. He is comfortable with the company as it now stands, with about 6,000 employees or 10% fewer than last year. The company's profitability in the fourth quarter is not all due to cost-cutting initiates, though – pre-tax income from the wealth management has more than doubled since 2011, and net margins are up to 17% from 7% in the third quarter. The company's institutional services division was also strong, along with fixed income and commodities; sales and trading was up year-over-year, but is down since the third quarter.
Going forward, the big question investors have is: Can Morgan Stanley sustain its current momentum?
The large buyer of out-of-the-money calls on Friday would argue "Yes," and for good reason. Morgan Stanley has completed a series of difficult cost-cutting initiates that it will now reap the benefits of. They have also shifted their focus away from the risky, capital-intensive, and highly regulated business of fixed-income trading, and towards wealth management. The company's wealth management division shows the most promise for strong, stable future profits and high margins. CEO Gorman also said that the "overwhelming amount" of capital freed up from the transition away from sales and trading will be "returned to shareholders as soon as is practical."
Buying out-of-the-money calls on this stock is a good way to keep both risk and outlay of capital to a minimum. The stock has nearly doubled in the last 6 months, and could therefore see some volatility as investors take profits. That said, last week the stock broke through resistance at $21.20, which was its 2012 high. The next level of resistance looks to be $24.50, which is a swing high from mid-2011.
Disclosures: I do not have any position in Morgan Stanley
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
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