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Today's Options Market Update

Stocks Volatile as Investors Digest Earnings, Data

U.S. stocks are giving back some of yesterday's sharp advance, with technology issues leading the way in the wake of Dow member IBM's revenue miss, which is overshadowing some upbeat earnings results from the chip sector on both sides of the pond. However, Netflix and United Continental are rallying following their upbeat reports as earnings season heats up. Treasury yields are dipping following a disappointing housing construction activity report and ahead of the minutes from the Fed's September meeting later today. The U.S. dollar is higher, along with gold, while crude oil prices are falling in the wake of a much larger-than-expected drop in oil inventories. Asia finished higher and Europe is broadly lower.

At 10:50 a.m. ET, the Dow Jones Industrial Average is down 1.1%, while the S&P 500 Index and the NASDAQ Composite are declining 0.9%. WTI crude oil is dropping $2.12 to $69.80 per barrel, Brent crude oil is falling $1.73 at $79.68 per barrel, and wholesale gasoline is off $0.05 at $1.93 per gallon. The Bloomberg gold spot price is advancing $0.86 to $1,225.81 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is gaining 0.3% to 95.31. Natural Gas has traded in a range of $3.24-3.30 today and was last seen trading higher by $0.05 (or +1.42%) to $3.29/MMBtu.

Source: Schwab Center for Financial Research

Today’s Bullish Activity

Multiple stocks are moving higher this morning in reaction to quarterly earnings results:

  • CSX Corp. (CSX + $0.53 to $72.73): The railroad operator reported Q3 earnings of $1.05 per share ($0.11 beat) on revenue of $3.13B (above the $3.05B expected) as the company’s operating ratio set a quarterly record of 58.7% (vs. 68.4% in the year-ago quarter). In terms of guidance, the company said that it expects full-year 2018 revenue to be +6-8% year-over-year (vs. a prior outlook of “mid-single digits”). Calls are outnumbering puts roughly 3:1 with the October 19th 72.50 call being the most actively traded contract (volume is 1,616 vs. open interest of 6,737).
  • Lam Research Corp. (LRCX + $4.77 to $150.04): The chip-equipment maker reported fiscal Q1 earnings of $3.36 per share ($0.14 beat) on revenue of $2.33B (above the $2.31B expected) with gross margins coming in at 46.4% (vs. the 46.1% est.). Looking ahead, the company said that Q2 EPS is expected to come in a range of $3.45-3.85 (vs. the $3.45 est.) on revenue of $2.35-2.65B (vs. the $2.35B est.), both of which have midpoints above their respective consensus estimates. Calls are outnumbering puts nearly 5:3 with the October 19th 152.50 call topping the most actives list (volume is 1,654 vs. open interest of 1,162).
  • Netflix Inc. (NFLX + $24.90 to $371.30): The video-streaming company reported Q3 earnings of $0.89 per share ($0.21 beat) on revenue of $4.00B (slightly above the $3.99B expected). The company had 6.96M net new subscribers during the quarter (vs. 5M guidance) – 1.09M new U.S. subscribers (vs. 650K guidance) and 5.87M new international subscribers (vs. 4.35M guidance). The company issued soft guidance as Q4 EPS is expected to be $0.23 (vs. the $0.49 expected) on revenue of $4.2B (vs. the $4.23B consensus estimate), though Q4 subscriber additions are expected to be +9.4M (1.8M from U.S. and 7.6M from international), which is above the 7.5M consensus estimate. Calls are outnumbering puts roughly 5:3 with the October 19th 380.00 call (volume is 12,743) and 400.00 call (volume is 12,393) leading the way.
  • United Continental Holdings Inc. (UAL + $4.44 to $87.96): The airliner reported Q3 earnings of $3.06 per share ($0.01 miss) on revenue of $11.00B (above the $10.95B expected) as consolidated passenger revenue per available seat mile (PRASM) increased 6.1% year-over-year (above the high end of the company’s prior guidance of +4-6%). The company said that it expects to recapture ~90% of the estimated $2.5B year-over-year increase in fuel expenses and raised the lower end of its prior full-year 2018 EPS guidance to a range of $8.00-8.75 from $7.25-8.75. Commenting on the results, CEO Oscar Munoz stated, “Our growth plan has been essential to our success, and we’re more confident than ever we’ll achieve the ambitious adjusted EPS target of $11 to $13 we laid out for 2020”. Calls are slightly outnumbering puts with the October 19th 84.00 call garnering the most attention from traders (volume is 1,619 vs. open interest of 2,725).

New 52-week highs (10 new highs today): Endo International PLC (ENDP - $1.41 to $16.89), McCormick & Company Inc. (MKC - $1.10 to $135.94), Spirit Airlines Inc. (SAVE + $0.55 to $50.92)

Notable Call Activity

Some unusual call activity (4:1 over puts) is being seen in PayPal Holdings Inc. (PYPL - $0.56 to $80.05) which is primarily being driven by activity on the November 16th 85.00 call. Volume on this contract is 9,171 versus open interest of 2,305, so we know that this primarily represents new positioning. Most of the transactions on this contract consisted of various mid-sized blocks that were bought at or near various ask prices (ex. 400 @ $1.88, 350 @ $1.84, 150 @ $1.81, 138 @ $1.81), which suggests bullish intent. Note: PYPL is scheduled to report Q3 earnings tomorrow (October 17th) after the market close.

Today’s Bearish Activity 

Here are some names trading to the downside following quarterly earnings results:

  • Abbott Laboratories (ABT - $1.24 to $69.71): The health care company reported Q3 earnings of $0.75 per share (in-line with expectations) on revenue of $7.66B (slightly above the $7.65B expected). The company issued in-line guidance as Q4 EPS is expected to come in a range of $0.80-0.82 versus the $0.82 consensus estimate. Calls are outnumbering puts roughly 4:3 with the October 19th 70.00 call being the most actively traded contract (volume is 492 vs. open interest of 2,964).
  • IBM Corp. (IBM - $9.30 to $135.82): The integrated technology and services company reported Q3 earnings of $3.42 per share ($0.02 beat) on revenue of $18.76B (below the $19.04B expected) as system sales were $1.74B during the quarter (below the $1.79B expected). This represents the first time over the past five quarters that IBM has missed the revenue estimate. The company reaffirmed its full-year 2018 EPS guidance of “at least $13.80” (vs. the $13.81 consensus estimate) with free cash flow expected to be ~ $12B. Shares of IBM are trading at a two-year low this morning. Calls are outpacing puts roughly 4:3 with the December 21st 190.00 call topping the most actives list (volume is 7,501 vs. open interest of 46).
  • Northern Trust Corp. (NTRS - $7.30 to $92.08): The provider of wealth management services reported Q3 earnings of $1.58 per share ($0.03 miss) on revenue of $1.48B (below the $1.52B expected) with the net interest margin coming in at 1.47% (slightly below the prior quarter’s 1.48%). The stock is trading at an 11-month low following the results. Calls are slightly outnumbering puts with the October 19th 95.00 call topping the most actives list (volume is 289 vs. open interest of 30).

New 52-week lows (43 new lows today): Bank of New York Mellon Corp. (BK - $0.73 to $48.62), Eagle Materials Inc. (EXP - $3.16 to $76.71), Lear Corp. (LEA - $3.40 to $131.30), YY Inc. (YY - $3.64 to $65.24)

Notable Put Activity

Some unusual put activity (4:1 over calls) is being seen in Corning Inc. (GLW - $0.34 to $32.30) as options traders primarily target the November 16th 32.00 put. Volume on this contract is 6,129 (vs. open interest of 1,096) which mostly consisted of a 4,193 block that was bought for $1.10 when the bid/ask spread was $1.07 x $1.12. We know this block is a new position given the open interest figure and we can assume the intent is bearish in nature since the trade took place above the midpoint of the bid/ask spread.

Volume Signals     

Multiple large blocks were coming up on the radar on Macy’s Inc. (M - $1.46 to $32.06) as the following block trades were seen simultaneously trading on the November 16th expiration:

  • A 55K block was sold on the 32.00 put for $2.03 (open interest is 55,344).
  • A 30K block was bought on the 30.00 put for $1.21 (open interest is 3,144).
  • A 30K block was sold on the 29.00 put for $0.89 (open interest is 891).

Based on the open interest figures, it appears that a previously held long 55K put position was closed out and a $1.00-wide bear put spread was simultaneously established using the 30.00 & 29.00 put strikes for a net debit of $0.32, which has the potential to be worth 3x that amount if M closes at or below $29.00 at expiration. Macy’s is scheduled to report fiscal Q4 earnings on November 14th so this bearish spread captures the potential impact of that event.

PHLX Gold & Silver Sector ETF ($XAU + $0.04 to $70.14): Option volume is running at over 50x the daily average of 181 contracts which is primarily being driven by a 10K block that was bought on the December 21st 70.00 call for $4.00 when the bid/ask spread was $2.50 x $5.20 (open interest is 34,224). However, since the block size is below open interest we don’t know whether this is a new position or not.

AES Corp. (AES - $0.14 to $15.22): Option volume is running at over 3x the daily average of 2,166 contracts which is primarily being driven by activity on the November 16th 15.00 put. Volume on this contract is 6,196 (vs. open interest of 457), which mostly consisted of a 2,400 block that was bought at the ask price of $0.50 (suggesting bullish intent) and a 3,600 block that traded for $0.45 when the bid/ask spread was $0.40 x $0.50.  

iShares US Home ETF (ITB - $0.85 to $31.84): A 4K block was bought on the December 21st 34.00 call at the ask price of $0.70 (open interest is 571). We know this is a new position given the open interest figure and we can assume the intent is bullish in nature since the trade executed at the ask price.

Gauging Volatility

The CBOE Volatility Index (VIX + 0.19 to 17.81) is slightly higher at the time of this writing (12:04 PM ET) but well off this morning’s high (19.55) as U.S. equity markets are slightly lower around the mid-day mark today (DJI - 58, SPX - 2, COMPX - 20). VIX option volume has been average today at 302,622 contracts (#4 on the top 10 most actives list) and the activity has been call-biased (nearly 3:1 over puts). The most actively traded contract is the November 21st 20.00 call as volume is 53,016 versus open interest of 281,603.

Shares of Caesars Entertainment Inc. (CZR + $0.51 to $9.60) saw an intraday spike earlier this morning following a Reuters report that Golden Nugget Casino’s owner Tilman Fertitta approached the company regarding a potential merger. Call volume is dominating (7:1 over puts) as option traders primarily target the 10.00 call which expires at the end of this week (Oct 19th). CZR option premiums are swelling on the news as the current average implied volatility of 74% represents a two-year high. Note: the average implied volatility represents an estimated value for a 30-day implied volatility at the current underlying price, based on a curve fit of option implied volatilities.          

Interested in receiving notifications of intraday unusual option trades? Follow Schwab’s Vice President of Trading & Derivatives Randy Frederick on Twitter @RandyAFrederick who will be tweeting unusual options trades as he sees them throughout the day.

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All references to subjects (securities, indexes, futures contracts, and options contracts) were derived based on screens conducted by the writer for certain anomalous activity such as volumes, volatility and other related market data. As needed for brevity, the writer may have applied discretion when choosing among screen outputs for inclusion. Such discretion may have been based on news reports or other considerations of public interest. The views or opinions are those of the writer, and are subject to change without notice. All referenced subjects were chosen for illustrative purposes only and should not be considered recommendations, offers to sell, or solicitations of offers to purchase. This material includes information obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.
All references to subjects (securities, indexes, futures contracts, and options contracts) were derived based on screens conducted by the writer for certain anomalous activity such as volumes, volatility and other related market data. As needed for brevity, the writer may have applied discretion when choosing among screen outputs for inclusion. Such discretion may have been based on news reports or other considerations of public interest. The views or opinions are those of the writer, and are subject to change without notice. All referenced subjects were chosen for illustrative purposes only and should not be considered recommendations, offers to sell, or solicitations of offers to purchase.
Futures trading carries a high level of risk and is not suitable for all investors. Past performance is no guarantee of future results.

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