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Today's Options Market Update for August 20, 2019

Stocks & Bond Yields Modestly Lower

U.S. stocks are dipping on the heels of a three-day rally, that has been fueled by hopes of further stimulus measures from China, Germany and the U.S., along with a recent reprieve from the plunge in global bond rates. Treasury yields are seeing pressure return, with the economic calendar dormant again and as the markets await Friday's key speech from Federal Reserve Chairman Jerome Powell in Jackson Hole, Wyoming. The U.S. dollar is little changed and crude oil prices are dipping, while gold is regaining some momentum. Dow member Home Depot is higher in the wake of its mixed quarterly results, while Kohl's and TJX are falling after their earnings reports. Asia finished mixed and Europe is lower.

At 10:49 a.m. ET, the Dow Jones Industrial Average and the Nasdaq Composite are down 0.3%, while the S&P 500 Index is decreasing 0.4%. WTI crude oil is decreasing $0.82 to $55.32 per barrel and Brent crude oil is declining $0.68 at $59.06 per barrel, and wholesale gasoline is off $0.01 at $1.65 per gallon. The Bloomberg gold spot price is rising $6.80 to $1,502.72 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is little changed at 98.35. Natural Gas prices have traded in a range of $2.19-2.23 and were last seen trading slightly higher by $0.009 (or + 0.41%) to $2.219/MMBtu.

Source: Schwab Center for Financial Research

Today’s Bullish Activity

Multiple stocks are moving higher this morning following upbeat earnings reports:

  • Baidu.com Inc. (BIDU + $16.02 to $195.24): The Chinese technology company reported Q2 adjusted earnings of $1.47 per share ($0.55 beat) on revenue that increased 1.0% year-over-year to $3.84B (above the $3.72B expected). Looking ahead, the company said that Q3 revenue is expected to come in a range of $3.84-4.07B versus the $4.03B consensus estimate. Today’s ~7% jump puts the stock above its 50-day Simple Moving Average (SMA) of $110.96. Calls are outnumbering puts roughly 4:3 but the December 20th 120.00 put is the most actively traded contract (volume is 10,132).
  • Home Depot Inc. (HD + $9.67 to $217.62): The home improvement retailer reported Q2 earnings of $3.17 per share ($0.09 beat) on revenue of $30.84B (below the $30.98B expected) as comparable same-store sales increased 3.0% year-over-year. In terms of guidance, the company said that full-year 2020 EPS is expected to be ~$10.34 (above the $10.10 consensus estimate) on revenue of ~$110.7B (below the $111.18B expected). Today’s ~2% pop in the stock puts it above the 50-day SMA of $209.76. Calls are slightly outnumbering puts but the August 23rd 207.50 put is topping the most actives list (volume is 11,005).
  • Medtronic PLC (MDT + $4.22 to $108.40): The medical device company reported fiscal Q1 adjusted earnings of $1.26 per share ($0.08 beat) on revenue of $7.49B (above the $7.40B expected). Additionally, the company raised its 2020 adjusted EPS guidance to a range of $5.54-5.60 (from $5.44-5.50). Shares of MDT are trading at all-time highs following the results. Calls are outnumbering puts roughly 3:1 with the September 20th 112.00 call seeing the most action from traders (volume is 2,546).

 

New 52-week highs (72 new highs today): American Tower Corp. (AMT + $0.83 to $226.01), Chemed Inc. (CHE + $3.94 to $437.47), Lockheed Martin Corp. (MLM + $0.21 to $255.05), Public Storage Inc. (PSA + $1.82 to $262.88)

Notable Call Activity

Shares of Beyond Meat Inc. (BYND + $10.63 to $155.15) are gapping up on an upgrade from JP Morgan (from “Neutral” to “Overweight”) and some unusual near-term call activity is coming up on the radar. Calls are outpacing puts roughly 3:1 which is primarily being driven by activity on the August 23rd 160.00 call (volume is 14,445 vs. open interest of 1,865) and 165.00 call (volume is 10,030 vs. open interest of 1,165).  

Also seeing some heavy call activity (~50:1 over puts) is Carmax Inc. (KMX - $1.38 to $84.59) which is primarily being driven by a couple of fairly large blocks that simultaneously traded on the September 6th expiration:

  • 85.50 call – a 1,402 block traded for $1.77 when the bid/ask spread $1.70 x $1.85
  • 86.50 call – a 1,402 block traded for $1.27 when the bid/ask spread $1.20 x $1.35

However, both of these blocks traded just below their respective bid/ask spreads so we don’t whether this was a bullish (i.e. bull call spread) or bearish (i.e. bear call spread) spread.

Today’s Bearish Activity 

Leading the point decliners list this morning is Sarepta Therapeutics Inc. (SRPT - $18.51 to $101.80) following news that the U.S. Food & Drug Administration (FDA) rejected the company’s proposed treatment (golodirsen) for Duchenne muscular dystrophy (DMD). The FDA cited concerns over infection risk “related to intravenous infusion ports” as well as “renal toxicity”. Sarepta executives said that rejection came as a surprise and will work with FDA officials to review the concerns and “find an expeditious pathway forward for the approval of golodirsen”. Calls are outnumbering puts roughly 3:2 with the August 23rd 120.00 call leading the way (volume is 1,061).

Also trading to the downside is Fabrinet Co. (FN - $6.44 to $50.02) after the fiber-optics company beat quarterly results but provided soft guidance last night after the market close. Fiscal fourth quarter earnings came in at $1.00 per share ($0.06 beat) on revenue that increased 17.3% to $405.1M (above the $399.22) but the company guided Q1 EPS to a range of $0.80-0.84 on revenue of $386-394M (below the respective $0.96 and $407.32M consensus estimates). Shares of FN hit a two-month low of $47.02 earlier in the session. Calls are outnumbering puts roughly 2:1 with the September 20th 55.00 call garnering the most attention from traders (volume is 898).

 

New 52-week lows (85 new lows today): Alliance Data Systems Corp. (ADS - $3.24 to $133.30), Domino’s Pizza Inc. (DPZ - $2.06 to $229.96), Macy’s Inc. (M - $0.44 to $15.69), Sturm Ruger & Company (RGR - $1.06 to $40.76)

Notable Put Activity

Some unusual put activity (~5:2 over calls) is being seen in Conagra Brands Inc. (CAG - $1.11 to $28.94) as option traders primarily target the October 18th 25.00 put. Volume on this contract is 3,501 versus open interest of 17, so we know that this primarily represents new positioning. The bulk of the activity on this contract consisted of various sized blocks (1,400, 700, 350, 175, 175, etc.) that were being sold for $0.33. The activity suggests the put sellers believe that CAG will close at or above the $25.00 price level, or are comfortable taking a long positon in CAG at an effective purchase price of $24.67 at expiration.

Volume Signals     

Waddell & Reed Financial Inc. (WDR - $0.13 to $15.75): Option volume is running at roughly 200x the daily average of 101 contracts which is primarily being driven by activity on the December 20th 15.00 put. Volume on this contract is 12,049 (vs. open interest of 319) which nearly entirely consisted of an 11.44K block that was bought at the ask price of $1.00. 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 at the ask price.

Gap Inc. (GPS - $0.37 to $16.30): Option volume is running at over 3x the daily average of 7,355 contracts which is primarily being driven by multiple large blocks that traded on the August 23rd expiration:

  • 17.00 call – a 2,298 block was bought for $0.61 (open interest is 618)
  • 19.00 call – a 2,298 block was sold for $0.11 (open interest is 343)
  • 14.00 put – a 2,298 block was sold for $0.13 (open interest is 38)

We know these are new positions based on the open interest figures and it appears that the block trader established a (bullish) risk reversal call spread which was established for $0.37 (x 2,298 contracts x 100 multiplier, excluding commissions) which suggests that the block trader believes that GPS will close above $17.37 at expiration. The positioning comes ahead of this retailer’s Q2 earnings report which is scheduled to be released after the market close this Thursday (August 22nd).  

Elanco Animal Health Inc. (ELAN - $2.40 to $27.41): Option volume is running at over 20x the daily average of 323 contracts which is primarily due to multiple large blocks that simultaneously traded on the September 20th expiration:

  • 30.00 call  – a 2,000 block was sold for $0.50 when the bid/ask spread was $0.45 x $0.70 (open interest is 61)
  • 25.00 put  – a 2,000 block was sold for $0.20 when the bid/ask spread was $0.15 x $0.40 (open interest is 7)

We know these blocks are based on new positions based on the open interest figures and it appears that a short strangle was established for a net credit of $0.70 (x 2K contracts x 100 multiplier, excluding commissions), which suggests that the block trader believes that ELAN will close in between $25.00 and $30.00 at expiration (in which the entire $200,000 premium, excluding commissions, would be retained).

Gauging Volatility

The CBOE Volatility Index (VIX - 0.05 to 16.83) has been on both sides of the unchanged line today (intraday range is 16.57-17.70) as equity markets are modestly lower across the board around the mid-day mark today (DJI - 38, SPX - 6, COMPX - 8). VIX option volume has been average today at 272,266 contracts (#3 on the top 10 most actives list) and the activity has been call-biased (the volume put/call ratio is currently 0.37). The most actively traded contract is the August 21st 20.00 call as volume is 30,220 versus open interest of 313,360.

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. Past performance is no guarantee of future results. Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 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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