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Today's Options Market Update

Bulls Charge Higher for the Second Day in a Row

U.S. stocks are adding to yesterday's gains despite a flood of mixed earnings reports and flared-up global political uncertainty. Global economic optimism appears to be aiding sentiment, bolstered by yesterday's jump in Leading Indicators being followed by today's upbeat existing home sales report. However, the holiday-shortened week is likely keeping conviction and volume in check. Treasury yields are mixed and the U.S. dollar is dipping, while crude oil and gold are higher. Asia finished higher and Europe continues to shrug off German political turmoil.

At 10:52 a.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are rising 0.7%, while the NASDAQ Composite is advancing 1.0%. WTI crude oil is gaining $0.52 at $56.94 per barrel, Brent crude oil is increasing $0.36 at $62.58 per barrel, and wholesale gasoline is up $0.01 at $1.76 per gallon. The Bloomberg gold spot price is trading $5.01 higher to $1,281.92 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is dipping 0.1% to 93.97.

Source: Schwab Center for Financial Research

Today’s Bullish Activity

Multiple stocks are moving higher this morning after reporting quarterly earnings results:

  • Palo Alto Networks Inc. (PANW + $10.17 to $152.70): the cyber security firm reported Q1 earnings of $0.74 per share ($0.06 beat) on revenue of $505.5M (above the $489.36M expected) as billings increased 15% year-over-year to $596M (vs. guidance of $580-600M); the company said it expects Q2 EPS to come in a range of $0.78-0.80 on revenue of $518-528M (versus the respective $0.77 and $519.73M consensus estimates); calls are outnumbering puts 4:3 with the November 24th 160.00 call getting the most attention from traders (volume is 4,281 vs. open interest of 3,107).

  • Urban Outfitters Inc. (URBN + $1.40 to $29.67): the retailer reported Q3 earnings of $0.41 per share ($0.07 beat) on revenue of $892.77M (above the $860.64M expected) as comparable retail segment sales increased 2% year-over-year; The stock is trading at the highest levels since early January this morning; calls are outnumbering puts 5:2 with the December 15th 26.00 call leading the pack (volume is 3,017 vs. open interest of 7,821).

  • Cheetah Mobile Inc. (CMCM + $2.18 to $13.00): the mobile utility and content app developer reported Q3 earnings of RMB 1.10 per share (RMB 0.53 beat) on revenue of RMB 1.2B (slightly above the RMB 1.19B expected); adjusted EBITDA increased 133% year-over-year to RMB 186.9M; the company guided Q4 revenue to a range of RMB 1.25-1.31B versus the RMB 1.3B consensus estimate; the stock is trading at an eight-month high this morning; calls are outnumbering puts 14:1 with the December 15th 12.00 call seeing the most action (volume is 225 vs. open interest of 2,344).

New 52-week highs (300 new highs today): Credit Suisse Group (CS + $0.33 to $16.45), Honeywell International Inc. (HON + $1.41 to $149.35), Salesforce.com Inc. (CRM + $1.66 to $109.03)

Notable Call Activity

Some unusual call activity (100:1 over puts) is being seen in EOG Resources Inc. (EOG + $0.15 to $101.60) which is primarily being driven by activity on the January 2018 100.00 call. Volume on this contract is 10,009 versus open interest of 32,906, so we don’t know whether this is opening or closing activity. Nearly all of the volume on this contract is being attributed to a 10K block that was bought for $4.55 when the bid/ask spread was $4.35 x $4.65. The trade was coded as a spread trade but there wasn’t another block anywhere near the size of the block referenced above so it’s likely that the code was erroneous and it was simply a buy.

Today’s Bearish Activity

Multiple stocks are under pressure this morning after reporting quarterly earnings results:

  • Signet Jewelers Ltd. (SIG - $19.33 to $56.51): the world’s largest retailer of diamond jewelry reported Q3 earnings of $0.05 per share ($0.11 miss) on revenue of $1.16B (in-line with estimates) as comparable same-store sales decreased 5% year-over-year; the company’s results were hurt by credit outsourcing disruptions and guided full-year 2018 earnings a range of $6.10-6.50 (vs. the $7.05 consensus estimate) with expectations for same-store sales to decline “mid single-digit percentages” versus prior guidance of down “low to mid single-digit percentages”; puts are outnumbering calls nearly 2:1 with the December 15th 55.00 put leading the pack (volume is 1,600 vs. open interest of 2,352).

  • Campbell Soup Co. (CPB - $3.70 to $46.23): the food company reported Q1 earnings of $0.92 per share ($0.05 miss) on revenue of $2.16B (slightly below the $2.17B expected) as U.S. soup sales declined 9% year-over-year; the company guided full-year 2018 EPS to a range of $2.95-3.02 (down from prior guidance of $3.04-3.11 and below the $3.05 consensus estimate) on revenue of $7.73-7.89B (vs. the $7.88B consensus estimate); puts are outnumbering calls 3:2 but the December 15th 50.00 call is getting the most attention from traders (volume is 1,479 vs. open interest of 4,860).

  • DSW Inc. (DSW - $2.88 to $19.65): the shoe retailer reported Q3 earnings of $0.45 per share ($0.08 miss) on revenue of $708.3M (below the $710.24M expected) as comparable same-store sales decreased 0.4%; the company guided full-year 2018 EPS to a range of $1.40-1.45 which is below the $1.50 consensus estimate; the stock is trading below its 50-day SMA of $20.19 this morning; puts are outnumbering calls nearly 3:1 with the December 15th 20.00 put leading the pack (volume is 1,251 vs. open interest of 847).

New 52-week lows (34 new lows today): Criteo SA (CRTO - $0.31 to $33.67), Incyte Corp. (INCY - $1.02 to $97.93), Nustar Energy LP (NS - $0.30 to $27.98)

Notable Put Activity

Shares of GameStop Corp. (GME + $0.05 to $16.49) are trading slightly higher ahead of the company’s Q4 earnings report, which is scheduled to be released after the market close today, and some unusual put activity is being observed ahead of the release. Puts are outnumbering calls nearly 3:1 which is primarily being driven by activity on three contracts – the December 15th 16.00 put (volume is 3,672 vs. open interest of 3,344), the November 24th 16.50 put (volume is 2,305 vs. open interest of 5,011) and the November 24th 14.50 put (volume is 2,306 vs. open interest of 5,130). The activity on the December contract mostly consisted of various sized blocks that were sold at or near the bid price while the activity on the two November contracts appears to be some bull put spread activity (i.e. selling the 16.50 puts while simultaneously buying the 14.50 puts). Assuming all of the activity is new positioning it appears that the put sellers are expecting a positive reaction from GME following tonight’s earnings report. Options traders appear to be expecting a big post-earnings move (one way or the other) after the earnings release as the current average implied volatility level of 77% represents a three-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.

Volume Signals

Option volume is running at over ten times the daily average on TripAdvisor Inc. (TRIP + $1.58 to $32.06) and the activity is definitively call-biased (8:1 over calls). The top three most actively traded contracts are the January 2018 35.00 call (volume is 11,221), the January 2018 37.00 call (volume is 3,092) and the December 15th 34.00 call (volume is 2,730). The activity on the January 35.00 call included a 5,635 block that was bought at the ask price of $1.00, the activity on the January 2018 37.00 call mostly consisted of various sized blocks that were bought for $0.50 and the activity on the December 34.00 call mostly consisted of various sized blocks that were bought for $0.75 (all suggesting bullish intent). TRIP lost roughly 25% of its value in early November after reporting disappointing earnings and the stock hit a 52-week low of $29.50 back on November 15th, but is seeing its largest one day gain in several months.

Some heavy option volume (31,195 vs. 8,836 avg. daily volume) is also being seen on ILG Inc. (ILG - $0.33 to $28.28) and the activity is definitively put-biased (300:1 over calls). Over 90% of the volume is going toward the January 2019 22.00 put as volume is 30,955 versus open interest of 212,319. The activity on this contract included a 26K block that was bought at the ask price of $0.88, a 2,182 block that was bought for $0.88 (just below the ask price at the time of the trade) and a 1K block that was bought at the ask price of $0.88.

CSX Corp. (CSX + $0.45 to $50.16): A 5K block was bought on the January 2018 60.00 call for $0.15 (open interest is 24,282) when the bid/ask spread was $0.06 x $0.18. However, since volume is below open interest we don’t know whether this is an opening or closing transaction.

Gauging Volatility

The CBOE Volatility Index (VIX – 0.74 to 9.91) is moving lower for the fourth day in a row as equity markets exhibit strength for the second day in a row. VIX options volume has been slightly above average at 386,463 contracts (#5 on the most actives list) and the activity has been call-biased (3:1 over puts). The most actively traded contract is the December 20th 26.00 call as volume is currently 35,402 versus open interest of 58,639.

Note: Due to low market volume/activity we will not be publishing a Today’s Options Market Update on Wednesday, November 22nd or Friday, November 24th but will return to the normal schedule starting Monday, November 27th.

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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.

(1117-7JMG)

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