A lower-risk way to bet Morgan Stanley's upcoming earnings catapult stock to a new high

Published Wed, Jul 10 202410:26 AM EDT

As we kick off another earnings season, the banks will provide us with a preview of what's to come. Out of the major banks that are reporting early in the season, Morgan Stanley stands out as an outperformer that could continue its bullish run towards its all-time highs on strength from its wealth management business. Let's start with a longer-term chart of Morgan Stanley (MS) , which reports on July 16. We see that it recently broke out above a key $100 resistance level that has been in place since 2023, which puts the $109 all-time highs as a reasonable upside target. And if we zoom in, we see that MS has recently rallied up to a key resistance level at $103. A breakout above this level would be a clear bullish signal, with earnings as the catalyst. Morgan Stanley has been investing in building out its wealth 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 substantial boost to another earnings beat. Trading at 1.8 times book value, MS is trading at the upper end of its historical valuation. However, it's recent dividend raise and $20 billion share buyback program speaks to a strong financial outlook. The trade With low implied volatility, options on Morgan Stanley are relatively inexpensive. To capitalize on the bullish outlook, I am buying the August 16 $105/$110 Call Vertical for a $1.27 debit. This entails: Bought the August $105 Call at $1.98 Sold the August $110 Call at $0.71 Using a 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. The maximum potential gain is $373 per contract if MS is above $110 at expiration, providing an attractive risk/reward ratio. This strategy leverages the relatively low option premiums due to the low IV Rank, aligning with our bullish technical and fundamental thesis for Morgan Stanley. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.