U.S stocks are paring a recent rally that took the markets into positive territory for the year, as a host of mixed earnings reports are being met with lingering global trade and geopolitical concerns. Treasury yields continue to grind higher, along with crude oil prices, which may be adding to some of the market skittishness, while the U.S. dollar is flat and gold is down. Jobless claims dipped while Leading Indicators rose. Asia moved higher and Europe is mixed.
At 10:54 a.m. ET, the Dow Jones Industrial Average is dipping 0.1%, the S&P 500 Index is declining 0.5%, and the NASDAQ Composite is decreasing 0.6%. WTI crude oil is increasing $0.59 at $69.06 per barrel, Brent crude oil is advancing $0.94 to $74.42 per barrel, and wholesale gasoline is up $0.02 at $2.09 per gallon. The Bloomberg gold spot price is down $3.40 at $1,346.01 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is flat at 89.59. Natural Gas has traded in a range of $2.684-2.751 and was last seen trading lower by $0.052 (or 1.90%) to $2.687/MMBtu.
Source: Schwab Center for Financial Research
Today’s Bullish Activity
Multiple stocks are moving higher this morning in reaction to quarterly earnings results:
Alcoa Corp. (AA + $2.09 to $61.49): the aluminum producer reported Q1 earnings of $0.77 per share ($0.09 beat) on revenue of $3.09B (below the $3.16B expected); Alcoa said it expects a global deficit for both aluminum and alumina in and anticipates demand growth to be 4.25-5.25% in 2018; the company also raised full-year adjusted EBITDA to between $3.5-3.7B; multiple analysts raised price targets on the stock following the results; calls and puts are trading roughly even with the May 18th 60.00 put getting the most attention from traders (volume is 4,863 vs. open interest of 410).
American Express Co. (AXP + $5.01 to $100.16): the financial services company reported Q1 earnings of $1.86 per share ($0.15 beat) on revenue of $9.72B (above the $9.49B expected) as provisions for losses increased 35% to $775M from $573M; the company issued upside guidance as full-year 2018 EPS is expected to be at the high end of the $6.90-7.30 range versus the $7.10 consensus estimate; calls are outnumbering puts roughly 3:2 with the May 18th 95.00 call leading the most actives list (volume is 3,214 vs. open interest of 5,477).
Bank of NY Mellon Co. (BK + $2.76 to $55.02): the investment management and investment services company reported Q1 earnings of $1.10 per share ($0.14 beat) on revenue of $4.18B (above the $4.04B expected); in terms of guidance the company said that Q2 EPS is expected to come in a range of $1.07-1.10 versus the $1.08 consensus estimate and raised its full-year 2018 EPS estimate to a range of $4.38-4.48 versus the prior range of $4.25-4.35; puts are outnumbering calls better than 2:1 with the May 18th 50.00 put seeing the most action from traders (volume is 1,008 vs. open interest of 488).
Danaher Corp. (DHR + $1.70 to $104.10): the diversified machinery company reported Q1 earnings of $0.99 per share ($0.05 beat) on revenue of $4.7B (above the $4.54B expected) as assets under management increased 8% to $1.9T; today’s 2% jump puts the stock above its 200-day SMA of $53.61; call volume is dominating (12:1 over puts) which is being driven by activity on the June 15th 105.00 call (volume is 1,283 vs. open interest of 1,694).
New 52-week highs (57 new highs today): Archer Daniels Midland Company (ADM + $0.26 to $45.91), Hess Corp. (HES + $0.47 to $58.39), Textron Inc. (TXT + $1.40 to $65.39), W.W. Grainger Inc. (GWW + $16.31 to $301.00)
Notable Call Activity
Some unusual call activity (20:1 over puts) is being seen in Kraft Heinz Company (KHC - $0.28 to $60.51) which is primarily being driven by activity on the October 19th 62.50 call. Volume on this contract is 10,702 (vs. open interest of 699) which nearly entirely consisted of a 10K block that was bought at the ask price of $2.70. Since the block size is above open interest we know that this is a new position and since it was bought at the ask price we can assume that the intent is bullish in nature. KHC is trading less than 2% above its 52-week low of $59.48 which it hit back on April 3rd.
Some heavy call activity (7:1 over puts) is also being seen in Devon Energy Corp. (DVN + $0.31 to $36.42) which is being driven by activity on the October 19th 40.00 call. Volume on this contract is 10,586 (vs. open interest of 498) which primarily consisted of three large blocks (3,159, 3,064 & 3,064) that were bought for $2.25. Since the block sizes are above open interest we know that these are new positions and since they were bought we can assume that the intent is bullish in nature
Today’s Bearish Activity
Here are some names trading to the downside following quarterly earnings results:
Philip Morris International (PM - $15.94 to $85.50): the tobacco giant reported Q1 earnings of $1.00 per share ($0.12 beat) on revenue of $6.90B (below the $7.03B expected) as cigarette and heated tobacco unit shipment volume decreased 2.3% to 173.8B; the company issued in-line guidance as full-year 2018 EPS $5.25-5.40 versus the $5.26 consensus estimate; the stock is trading at a 16-month low this morning; calls are outnumbering puts nearly 2:1 but the April 20th 85.00 put is leading the way (volume is 3,971 vs. open interest of 103).
The Procter & Gamble Company (PG - $3.18 to $74.30): the consumer goods maker reported fiscal Q3 earnings of $1.00 per share ($0.01 beat) on revenue of $16.28B (slightly above the $16.22B expected); the company issued in-line guidance as full-year 2018 EPS is expected to come in a range of ~$4.15-4.23 on revenue of ~$67.0B versus the respective $4.19 and $66.98B consensus estimates; earlier in the morning the stock hit a two-year low of $74.20; calls are outnumbering puts nearly 3:2 with the May 18th 77.50 call topping the most actives list (volume is 5,177 vs. open interest of 1421).
Sleep Number Corporation (SNBR - $5.44 to $31.07): the provider of sleep solutions and services reported Q1 earnings of $0.52 per share ($0.04 miss) on revenue of $389M (below the $396.68M expected); the company reaffirmed full-year 2018 EPS guidance to a range of $1.70-2.00 versus the $1.88 consensus estimate; the stock is trading at a five-month low this morning; put volume is dominating (6:1 over calls) which is being led by activity on the April 20th 35.00 put (volume is 662 vs. open interest of 3,087).
New 52-week lows (29 new lows today): Altria Group (MO - $3.29 to $58.21), Cirrus Logic Inc. (CRUS - $1.23 to $37.75), Cooper Tire & Rubber Company (CTB - $0.55 to $27.90), Hanesbrands Inc. (HBI - $0.15 to $17.76)
Notable Put Activity
Some unusual put activity (6:1 over calls) is being seen in Pepsico Inc. (PEP - $0.59 to $106.39) as options traders primarily target multiple contracts that expire at the end of next week (April 27th):
PEP 4/27/2018 105.00 P (volume is 3,468 vs. open interest of 94)
PEP 4/27/2018 106.00 P (volume is 3,035 vs. open interest of 110)
PEP 4/27/2018 102.00 P (volume is 3,029 vs. open interest of 46)
We know that we have new positioning on these three contracts given the open interest data and the activity mostly consisted of various sized blocks that were part of various spread trades (it was difficult to identify them as bullish or bearish based on where the trades took place). PEP is scheduled to report Q1 earnings before the market open on April 26th so the activity on these contracts captures the potential impact of that event.
Some unusual block activity is being seen in the SPDR S&P Oil & Gas Exploration ETF (XOP + $0.28 to $39.34) as the following three blocks simultaneously traded earlier this morning:
A 25K block was sold on the 6/15/2018 31.00 P for $0.12 (open interest is 51,933)
A 25K block was bought on the 6/15/2018 34.00 P for $0.44 (open interest is 49,690)
A 50K block was bought on the 7/20/2018 36.00 P at the ask price of $1.00 (open interest is 529)
It’s impossible to be certain but based on the open interest data it appears that a previously held bull put spread (i.e. short 25K 34.00 puts/long 25K 31.00 puts) was closed out and a long 50K 36.00 put position on the July 20th expiration was simultaneously established (suggesting bearish intent).
Regions Financial Co. (RF + $0.08 to $17.99): Option volume is running at over 7x the daily average which is primarily due to activity on the April 20th 18.00 put. Volume on this contract is 20,080 (vs. open interest of 1,109) which primarily consisted of a 19.80K block that was sold at the bid price of $0.25. We know this block is a new positon given the open interest data and since it was sold we can assume that the block trader believes that RF will close above the break-even price of $17.75 at expiration. RF is scheduled to report Q1 earnings before the market open tomorrow morning so apparently the block trader believes that the stock will have a neutral or bullish response to the report.
The CBOE Volatility Index (VIX + 0.72 to 16.32) is moving higher today as equity markets encounter some modest selling pressure. VIX options volume has been on the light side at 194,143 contracts (#8 on the most actives list) and the activity has been call-biased (5:2 over puts). The most actively traded contract is the June 20th 15.00 put as volume is 50,079 vs. open interest of 112,189.
Shares of the Clorox Company (CLX - $7.25 to $119.47) are gapping down to a 52-week low after Morgan Stanley downgraded the consumer products company to “Underweight” from “Equal Weight” and lowered their price target to $116.00 from $128.00. Morgan Stanley analyst Dara Mohsenian said that valuation is “stretched” and lowered his full-year 2019 earnings estimate by 2% to reflect expected softness in the U.S. household products sector. As a result of the sell-off in the stock CLX option prices are inflating as the current average implied volatility average of 26.5% represents a four-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.
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