U.S. stocks are broadly rebounding from yesterday's late-session slide despite flared-up uncertainty regarding tax reform's ability to make it through Congress. Financials are up, along with Treasury yields and the U.S. dollar. Costco's results followed yesterday's jump in retail sales to help bolster the consumer outlook, though CSX is falling as its CEO went on medical leave. Crude oil and gold are up modestly. Industrial production missed but the prior month's jump was revised higher. Asia finished mixed and Europe is diverging. Today is quadruple witching day so volatility may tick up as options and futures contracts simultaneously expire.
At 10:57 a.m. ET, the Dow Jones Industrial Average is up 0.5%, the S&P 500 Index is rising 0.7%, and the NASDAQ Composite is gaining 0.6%. WTI crude oil is increasing $0.31 at $57.35 per barrel, Brent crude oil is advancing $0.14 at $63.45 per barrel, and wholesale gasoline is flat at $1.67 per gallon. The Bloomberg gold spot price is trading $0.91 higher to $1,253.88 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is increasing 0.3% to 93.75. Natural Gas was last seen trading down $0.046 (or -1.71%) to $2.638/MMBtu after hitting a fresh 52-week low of $2.626 earlier in the trading session.
Source: Schwab Center for Financial Research
Today’s Bullish Activity
Gapping up to all-time highs this morning is Costco Wholesale Co. (COST + $7.22 to $193.75) after the membership warehouse operator reported Q1 earnings of $1.36 per share ($0.01 beat) on revenue of $31.81B (above the $31.01B expected). Costco’s comparable same-store sales, excluding the impact of fuel and currency fluctuations, increased 7.9% (above the 5.6% analysts had expected) while comparable e-commerce sales increased 43.5% year-over–year. Calls are outnumbering puts 2:1 with the December 15th 187.50 call being the most actively traded contract (volume is 2,397 vs. open interest of 2,380).
Also trading to the upside is Adobe Systems Inc. (ADBE + $4.73 to $179.73) after the Photoshop maker reported Q4 earnings of $1.26 per share ($0.10 beat) on revenue of $2.01B (above the $1.95B expected). Adobe’s Experience Cloud segment achieved record revenue of $550M which represents 18% growth year-over-year. Looking ahead, the company said it expects Q1 earnings of $1.27 per share on revenue of $2.04B versus the respective $1.25 and $2.04B consensus estimates. Calls are outnumbering puts 3:2 with the January 19th 2018 180.00 call getting the most attention from traders (volume is 1,353 vs. open interest of 3,345).
Lastly, Hess Corporation (HES + $1.45 to $43.87) is moving higher today after the Wall Street Journal reported that activist hedge fund Elliott Management Corp. is seeking to remove Chief Executive John Hess or intends to push him to sell all or part of the company. This represents the second time that the hedge fund, which owns 6.7% of the company, is targeting the company (the first time was back in 2013). Elliott portfolio manager John Pike cited “continued underperformance” at Hess stating, “Shareholders are getting impatient, because the changes needed to remedy Hess’s severe undervaluation are substantial and need to be announced without delay”. Call volume is dominating (20:1 over puts) which is being driven by activity on the January 19th 2018 45.00 call (volume is 4,878 vs. open interest of 7,823).
New 52-week highs (62 new highs today): Best Buy Inc. (BBY + $1.44 to $65.19), Clorox Company (CLX + $1.54 to $147.80), Delta Airlines Inc. (DAL + $0.50 to $55.75), McDonald’s Corp. (MCD + $1.66 to $174.80), Nike Inc. (NKE + $0.30 to $64.83)
Notable Call Activity
Some unusual call activity (25:1 over puts) is being seen in American Airlines Group Inc. (AAL + $0.70 to $50.91) which is primarily being driven by activity on the February 16th 55.00 call. Volume on this contract is 10,045 versus open interest of 8,570, so we know that we have some new positioning here. The activity on this contract mostly consisted of a 6,400 block that traded for $0.94 and a 3,600 block that traded for $0.95 when the bid/ask spread was $0.90 x $1.00.
Today’s Bearish Activity
Moving lower this morning is Oracle Corporation (ORCL - $2.77 to $47.43) after the software company reported fiscal Q2 earnings of $0.70 per share ($0.02 beat) on revenue of $9.63B (above the $9.57B expected). Although the company beat on both the top and bottom line, investors appear to be focusing on the revenue miss from the company’s cloud-based business which came in at $1.52B versus the $1.56B estimate. Concurrent with the earnings release Oracle increased its existing share repurchase program by $12B. Calls are outnumbering puts 4:3 with the January 19th 2018 50.00 call getting the most attention from traders (volume is 8,673 vs. open interest of 31,776).
Also trading to the downside is CSX Corp. (CSX - $4.25 to $53.06) following news that CEO Hunter Harrison has taken a medical leave for unexpected complications from a recent unspecified illness. On a conference call with analysts last night, acting CEO James Foote offered no timeframe for Harrison’s return but said that he intends to run the company in the same manner as Harrison. Implied volatility has moved up to 32% this morning from yesterday’s 25% closing level. Option volume is heavy today (9x the daily average of 5,085) and the activity is call-biased (2:1 over puts). The most actively traded contract is the February 2nd 60.00 call as volume is 6,666 versus open interest of 17,436. 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.
New 52-week lows (38 new lows today): Argan Inc. (AGX + $1.05 to $42.90), First Republic Bank (FRC - $0.05 to $88.49), Prothena Corp. (PRTA - $0.09 to $36.49)
Notable Put Activity
Some unusual put activity (732:1 over calls) is being seen in AngloGold Ashanti Limited (AU + $0.09 to $9.24) which is primarily due to activity on the January 19th 9.00 put. Volume on this contract is 36,651 versus open interest of 7,896, so we know that bulk of the volume represents new positioning. Contracts were mostly being bought at or near the ask price, including a 10K block that was bought for $0.33 (when the bid/ask spread was $0.30 x 0.35) and another 10K block that was bought for $0.32 (when the bid/ask spread was $0.25 x $0.35), which suggests bearish intent.
Multiple large blocks were seen trading in Discovery Communications Inc. (DISCK + $0.92 to $19.57) as a 5K block was bought on the March 2018 22.50 call for $1.10 and another block of the same size was sold on the March 2018 25.00 call for $0.58. Both of the block sizes were above open interest so we know that this is a new spread position. It appears that a bull call spread was established for a net debit of $0.52 (x 5K contracts x 100 multiplier, excluding commissions) and suggests that the block trader feels that DISCK will close above the break-even price of $23.02 at expiration. Earlier in the morning shares of DISCK hit a fresh two-month high of $20.30.
Shares of Cree Inc. (CREE + $0.65 to $38.69) are trading at a two-year high this morning and a couple of large blocks were seen trading earlier this morning. A 5K block was sold on the January 19th 31.00 call (open interest is 5,366) for $7.00 and another block of the same size was simultaneously bought on the March 2018 40.00 call for $2.55 (open interest is 546). Based on the open interest, it appears that a previously held 5K position was rolled out (from the Jan to the Mar expiration) and up (from the 31.00 strike to the 40.00 strike), which suggests that the block trader feels that CREE has additional upside over the next three months.
The CBOE Volatility Index (VIX - 1.06 to 9.43) is down over 10% this morning as U.S. equity markets continue to push higher into record territory. VIX options volume has been average at 289,031 contracts (#6 on the most actives list) and the activity has been call-biased (5:3 over puts). The most actively traded contract is the January 17th 2018 10.00 put as volume is currently 25,772 versus open interest of 75,410.
Shares of oncology-focused biopharmaceutical company Tesaro Inc. (TSRO - $6.22 to $77.65) are dropping to a fresh 52-week low following a Jeffries price target cut (from $123 to $80) and implied volatility is seeing a modest uptick as a result. Today’s average implied volatility is up 6 ticks to 57% from yesterday’s closing level of 51%, which represents a three-month high. Back on June 29th 2016 the stock gapped up from a June 28th closing level of $37.21 to $68.78 the following morning and ended up closing at $77.40, so the stock is potentially approaching a critical “gap-up” area (for reference TSRO hit an all-time high of $192.94 back in February this year).
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