Large Morgan Stanley Option Traders Make Bullish Bets Following Fed Commentary

Big bank stocks experienced mixed trading on Thursday morning following the Federal Reserve’s second rate cut of the year. However, Morgan Stanley MS definitely had some large option traders’ attention following the Fed decision.

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The Trades

On Thursday morning, Benzinga Pro subscribers received two option alerts related to unusually large Morgan Stanley trades:

At 9:33 a.m., a trader bought 1,901 Morgan Stanley call options with a $46 strike price expiring on Nov. 15 near the ask price at 97.1 cents. The trade represented a $184,987 bullish bet.

Less than a minute later, likely the same trader bought another 7,331 Morgan Stanley of the same $46 Nov. 15 call options near the ask price at $1.011. The second trade represented a $741,164 bullish bet.

Together, the two trades represented a $926,151 total bet that Morgan Stanley shares have at least another 5.7% upside within roughly the next two months.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the size of the two large Morgan Stanley call buys and the fact that they occurred within a minute of each other, they could easily have represented institutional hedges.

Fed Finished With Cuts?

For bank stock investors, the bull thesis is all about the U.S. economic outlook and the monetary policy decisions of the Fed.

On Wednesday, the Federal Reserve cut interest rates by another 0.25%. However, the updated Fed dot plot revealed five members believed this week’s cut was unnecessary and five members believe an additional 2019 rate cut is not needed.

On the trade war front, high-level talks between the U.S. and China are set to resume in October ahead of another potential round of tariff hikes in December.

Benzinga’s Take

Assuming Thursday's Morgan Stanley trading action does not represent hedging, it was markedly bullish in nature. Option traders seem to be making longer-term bets that the U.S. economy won’t require aggressive monetary easing to continue to grow. The traders may also be betting October trade war negotiations will put the U.S. and China closer to a deal.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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