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Today's Options Market Update

Stocks Rally on Tax Reform Progress

U.S. stocks are higher, buoyed by relative tax-reform optimism on the heels of late last night's Senate budget resolution passing. Treasury yields and the U.S. dollar are gaining ground, with the fiscal policy optimism being met with Fed leadership speculation and an unexpected rise in existing home sales. The markets are moving higher even as Dow member General Electric severely missed earnings forecasts. Gold is lower and crude oil is up. Asia finished higher and Europe is gaining ground.

At 10:53 a.m. ET, the Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ Composite are gaining 0.3%. WTI crude oil is increasing $0.19 at $51.70 per barrel, Brent crude oil is rising $0.43 at $57.66 per barrel, and wholesale gasoline is up $0.02 at $1.67 per gallon. The Bloomberg gold spot price is trading $7.14 lower to $1,282.99 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is advancing 0.3% to 93.56.

Source: Schwab Center for Financial Research

Today’s Bullish Activity

Multiple stocks are moving higher today after reporting quarterly earnings results:

  • Paypal Holdings Inc. (PYPL + $3.35 to $70.60): the digital payment company reported Q3 earnings of $0.46 per share ($0.03 beat) on revenue of $3.24B (above the $3.18B expected); 8.2M active customer accounts were added in the quarter and with payment transactions increasing 26% to 1.9B; the company increased its full-year 2017 EPS forecast to a range of $3.96-4.00 from a prior range of $3.90-3.97 and versus the $3.96 consensus estimate; multiple brokerages increased their price targets following the report; the stock is trading at an all-time high this morning; calls are outnumbering puts better than 3:1 with the October 20th 70.00 call being the most actively traded contract (volume is 2,310 vs. open interest of 1,487).

  • Skechers USA Inc. (SKX + $7.50 to $31.54): the footwear retailer reported Q3 earnings of $0.59 per share ($0.15 beat) on revenue of $1.09B (above the $1.07B expected) as comparable same-store sales increased 4.4%; the company issued in-line Q4 EPS guidance of $0.09-$0.14 on revenue of $860-885M versus the respective $0.12 and $875.6M consensus estimates; today’s 20% jump puts the stock above both its 50-day ($26.02) and 200-day ($26.29) simple moving average (SMA); calls are outnumbering puts 3:1 with the October 20th 30.00 call leading the pack (volume is 1,164 vs. open interest of 11,708).

  • Intuitive Surgical Inc. (ISRG + $12.58 to $370.04): the maker of da Vinci surgical robots reported Q3 earnings of $2.77 per share ($0.78 beat) on revenue of $806.1M (above the $753.25M expected) which was driven by a 15% increase in worldwide da Vinci procedures; calls are outnumbering puts 5:3 with the October 20th 415.00 call getting the most attention from traders (volume is 384 vs. open interest of 34).

  • Atlassian Corporation PLC (TEAM + $8.08 to $48.33): the enterprise collaboration software vendor reported Q1 earnings of $0.12 per share ($0.03 beat) on revenue of $193.8M (above the $185.78M expected); the company issued upside Q2 EPS guidance of $0.12 on revenue of $203-205M versus the respective $0.10 and $200.23M consensus estimates; the stock is trading at an all-time high this morning; calls are outnumbering puts 3:1 with the November 17th 50.00 call leading the pack (volume is 495 vs. open interest of 1).

New 52-week highs (284 new highs today): Applied Materials Inc. (AMAT + $0.76 to $56.09), Bank of America Corp. (BAC + $0.48 to $27.06), Honeywell International Inc. (HON + $0.14 to $143.76)

Notable Call Activity

Some unusual call activity is being seen in a couple of railroad operators this morning:

  • Norfolk Southern Co. (NSC + $1.53 to $131.77): Calls are outnumbering puts 100:1 which is being driven by a couple of large block trades out on the March 2018 expiration – a 12K block was bought on the 155.00 call for $1.30 while another block of the same size was sold on the 165.00 call for $0.45. It appears that a bull call spread was established for a net debit of $0.85 (x 12K contracts x 100 multiplier, excluding commissions) and suggests that the block trader believes that NSC will close above the break-even price of $155.85 at expiration.

  • Union Pacific Corp. (UNP + $0.86 to $112.87): Calls are outnumbering puts 33:1 which is primarily being driven by a 15K block that traded on the March 2018 130.00 call for $0.90, which was directly in the middle of the $0.87 x $0.93 bid/ask spread. However, since open interest is 138,131 we don’t know whether this was an opening or closing transaction.

Today’s Bearish Activity

Below are a few high-profile names that are moving lower after reporting quarterly earnings:

  • General Electric Co. (GE - $0.63 to $22.95): the industrial conglomerate reported Q3 earnings of $0.29 per share ($0.20 miss) on revenue of $33.47B (above the $32.51B expected); this represents GE’s first profit miss in 2½ years; in addition, the company lowered its full-year profit forecast to $1.05-$1.10 from $1.60-1.70 per share and said it expects to generate approximately $7B in cash flow from operations, which is well below the prior forecast of $12-14B; the stock hit a two-year low of $22.10 earlier this morning; puts are outnumbering calls better than 3:2 with the November 17th 22.00 put getting the most attention from traders (volume is 15,866 vs. open interest of 69,161).

  • The Procter & Gamble Company (PG - $2.74 to $88.85): the consumer products company reported Q1 earnings of $1.09 per share ($0.01 beat) on revenue of $16.65B (slightly below the $16.69B expected) as organic sales increased 1% year-over-year; the company said it expects full-year 2018 EPS to come in a range of $4.12-4.19 on revenue of approximately $67B versus the respective $4.18 and $67.15B consensus estimates; calls and puts are trading roughly even with the October 20th 87.50 put getting the most attention from traders (volume is 1,493 vs. open interest of 5,564).

  • NCR Corporation (NCR - $3.68 to $33.37): the omni-channel solutions company reported Q3 earnings of $0.93 per share ($0.03 beat) on revenue of $1.66B (below the $1.68B expected); the company said it expects Q4 EPS to come in a range of $0.83-0.93 on revenue of $1.74-1.79B versus the respective $1.11 and $1.92B consensus estimates; the stock is trading at an 11-month low following the report; puts are slightly outnumbering calls but the November 17th 35.00 call is the most actively traded contract (volume is 548 vs. open interest of 18).

New 52-week lows (41 new lows today): Hormel Foods Corp. (HRL - $0.02 to $30.43), Kellogg Company (K - $0.64 to $61.06), Supervalu Inc. (SVU - $0.81 to $14.89)

Notable Put Activity

Some unusual put activity (23:1 over calls) is being seen in the Boston Scientific Co. (BSX + $0.01 to $29.59) which is being driven by activity on the November 17th 29.00 put. Volume on this contract is 6,823 versus open interest of 830, so we know that we have new positioning here. The bulk of the activity on this contract is coming from a 4,915 block that was bought at the ask price of $0.53, which suggests bearish intent. Earlier in the morning BSX hit a fresh 12-year high of $29.83.

Some heavy put activity (24:1) is also being seen in the SPDR Consumer Staples Select Sector ETF (XLP - $0.29 to $53.74) which is primarily due to activity on the November 10th 52.00 put. Volume on this contract is 21,182 versus open interest of only 1, so it’s likely that this is all new positioning. The majority of the transactions on this contract consisted of various sized blocks (643, 609, 504, 455, 448, 324, etc.) that were bought for $0.11, which suggests bearish intent.

Volume Signals

A couple of blocks were also seen trading in The Macerich Company (MAC - $0.17 to $56.95) as a 7K block was bought on the March 2018 65.00 call for $1.75 and another block of the same size was simultaneously sold on the March 2018 75.00 call for $0.35. It appears that a bull call spread was established for a net debit of $1.40 (x 7K contracts x 100 multiplier, excluding commissions) and suggests that the block trader believes that MAC will close above the break-even price of $66.40 at expiration.

Gauging Volatility

After hitting a one-month intraday high of 11.77 yesterday the CBOE Volatility Index (VIX - 0.21 to 9.84) has fallen back below the 10.00 level today as equity markets rally to fresh record highs. VIX options volume has been average at 303,548 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 November 15th 27.00 call as volume is currently 19,405 versus open interest of 97,577.

Shares of Celgene Corp. (CELG - $13.25 to $122.71) are under heavy selling pressure after the company announced that it is discontinuing two trials of its experimental drug to treat Crohn’s disease, following risk-benefit analysis by a data monitoring committee. The stock is trading at a four-month low on 4x the average daily equity volume. The drop is creating an uptick in IV as the current average implied volatility of 32% compares to yesterday’s 25% closing level. 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.

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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.

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