Trading Nation

With bank earnings on tap, here's how traders are looking to cash in

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'Trump bump' in financial markets should be reflected in US bank earnings, says analyst

Quarterly earnings season kicks into gear this week as reports from three big banks — Wells Fargo, Citigroup and JPMorgan — are set to be released on Thursday morning.

Independent analyst Mike Mayo told CNBC that the big banks may potentially turn in double digit growth in quarterly earnings, thanks to the "Trump bump" that benefited financial markets.

"The 'Trump bump' has materialized to some degree in the financial markets and you should see that in the bank earnings. You'll see better debt underwriting, better fixed income activity, you'll see the largest banks show double digit earnings growth on double digit growth in capital markets," Mayo said Thursday on CNBC's "Squawk Box".

Of the three banks scheduled to report earnings on Thursday, JPMorgan appears most attractive, said Dennis Davitt, options strategist at Harvest Volatility Management. The options market is pricing the "downside insurance" in the stock very low, Davitt said. In other words, investors are not anticipating a big move lower in the stock.

And by the same measurement, Davitt said Citigroup looks least attractive and would be particularly cautious about the stock at this juncture.

"Citigroup options are trading at a higher volatility; people are asking more money to sell you insurance on Citigroup," Davitt said Tuesday on CNBC's "Trading Nation."

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Which bank to buy ahead of earnings?

Meanwhile, "Wells Fargo has been kind of leaking a lot of bad news lately, so that's a stock that I don't think is going anywhere," Davitt added.

Indeed, Wells Fargo shares tumbled late last year when it was revealed that employees created fake accounts; the bank's CEO stepped down in the wake of the scandal.

Bank stocks as a group have fallen nearly 4 percent this year as the spread between the two-year Treasury yield and 10-year Treasury yield has fallen. As the yield curve flattens, the banks' net interest margins are negatively impacted.

But from a technical standpoint, Piper Jaffray technical analyst Craig Johnson sees potential in Citigroup. Its shares have fallen about 7 percent off its year-to-date highs, while its two peers are off about 10 percent. JPMorgan, Wells Fargo and Citigroup have all broken below their 50-day moving averages, Johnson observed.

"[Citigroup] is off the least amount, it's holding up better in terms of the charts, than where you're at with Wells Fargo and JPMorgan. And I'll point out that a close above $61.50 would start a new leg higher for Citigroup," he said in an interview Tuesday on CNBC's "Trading Nation."

Looking ahead, Johnson is closely watching the banks' relative strength, the group's net interest margin, and the overall trend of the struggling sector.

Still, Johnson said, "I still think that it's just a correction in the context of a longer-term uptrend for the financial sector itself," he said Tuesday.

The financials as a group will see further downside this year, said Todd Gordon of TradingAnalysis.com.

"I think some technical damage is done to these financials and we might want to explore some additional downside," he said Monday.

And to profit from the downside he foresees in the XLF, an exchange-traded fund that tracks the financials, Gordon turns to the options market.

He wants to sell the April 13 weekly 23-strike calls, and buy the April 13 weekly 24-strike calls. Gordon said on Monday he is selling the call spread for a 62 cents credit, or a credit of $62 per options spread.

The $62 would be Gordon's maximum reward on the trade, should the XLF close below $23 when the trade expires on Thursday. The XLF was trading around $23.30 on Wednesday.

Yen Nee Lee in Singapore contributed to this story.