Morgan Stanley option investors turn cautious post: Goldman

CHICAGO (Reuters) - Some option investors in Morgan Stanley <MS.N appear to be cautious headed into the company's earnings report on Thursday after Goldman Sachs disappointed investors with its results.

Morgan Stanley's options volume on Wednesday showed no strong directional bias with about 34,000 puts and 36,000 calls traded, or 2.6 times the usual turnover, data from option analytics firm Trade Alert showed.

On Thursday, Morgan Stanley reports fourth-quarter earnings before the opening bell.

Analysts, on average, expect the investment bank to report earnings of 35 cents a share, above the 29 cents it earned a year earlier, according to Thomson Reuters I/B/E/S.

"The option trading today in Morgan Stanley indicated that investors were hedging against any potential drawdown into earnings," said Steve Place, a founder of options analytics firm investingwithoptions.com in Mobile, Alabama.

"In the call options today, 45 percent were sold on the bid, 32 percent were bought on the offer, and 23 percent were traded between the bid/ask," he said.

This indicates that most calls were sold as a hedge, and there was similar action in the puts, which is most likely moderate hedging as there are no strong directional bets in either direction on volume characteristic before an earnings event, Place added.

SOME TURN BEARISH

Morgan Stanley's rival Goldman Sachs Group Inc (GS.N) said quarterly profits fell 53 percent on a sharp drop-off in trading revenue, dashing hopes that the Wall Street bank had bucked a tough trading climate in debt markets.

"The disappointing earnings from Goldman Sachs opens up the downside for Morgan Stanley in a way that previously did not exist," said TD Ameritrade chief derivatives strategist Joe Kinahan.

"Many investors had been very bullish on Morgan Stanley's earnings outlook and now are reconsidering or have decided to play the upside with call options since all they risk is the premium paid," Kinahan said.

Goldman Sachs' disappointing earnings has further lowered expectations for Morgan Stanley, said Schaeffer's senior technical strategist Ryan Detrick.

Heading into the earnings, Morgan Stanley's put-to-call open interest ratio stood at 1.29, with puts outpacing calls among options slated to expire within three months, according to Schaeffer's Investment Research.

This ratio is higher than 75 percent of the readings over the past year, suggesting option players are more bearishly positioned going into earnings, Detrick said.

"Therefore, there is the potential for an upside surprise on any decent news that comes out in their report that would drive the stock price from a contrarian view," Detrick added.

Meanwhile, Morgan Stanley options are pricing in a potential post-earnings share move of about 3.5 percent to 4.5 percent, according to options traders and analysts.

In terms of options market expectations, the at-the-money straddle is pricing in roughly a plus or minus 3.5 percent move, compared with an average move of 3 percent over the past four quarters, said Mike Thurow, options analyst at Susquehanna Financial Group. SFG is a market maker in the securities of Morgan Stanley.

Option traders often estimate earnings moves by looking at the stock's front-month straddle, which is a combination of a call and put with the same strike price and expiration date.

With Morgan Stanley reporting on Thursday, one day ahead of January expiration, the straddle's premium would primarily reflect the earnings event. A straddle is a volatility play and also an easy way to measure an expected move of a stock ahead of a risk event such as earnings.

(Reporting by Doris Frankel; Editing by Jan Paschal)