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Today's Options Market Update

Stocks Mixed in Choppy Trading Session

U.S. stocks are mostly lower on the heels of last week's global selloff that came on concerns regarding the recent rise in bond yields and flared-up uneasiness that the Fed may be heading toward a policy mistake as issues simmer below the surface. Earnings season continues to kick off, with Bank of America topping expectations but the Street is scrutinizing some of its results. The September retail sales report came in mixed, while Treasuries are little changed and the U.S. dollar is dipping. Crude oil prices are edging lower and gold is gaining ground. Asia finished mostly lower and Europe is mostly higher. 

At 10:52 a.m. ET, the Dow Jones Industrial Average is dipping 0.1%, the S&P 500 Index is declining 0.3%, and the Nasdaq Composite is dropping 0.9%. WTI crude oil is decreasing $0.05 to $71.29 per barrel, Brent crude oil is down $0.03 at $80.40 per barrel, and wholesale gasoline is off $0.02 at $1.93 per gallon. The Bloomberg gold spot price is up $12.29 to $1,229.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is trading 0.1% lower to 95.08. Natural Gas has traded in a fairly wide range of $3.18-3.27 today and was last seen trading higher by $0.09 (or 2.72%) to $3.25/MMBtu.

Source: Schwab Center for Financial Research

Today’s Bullish Activity

Shares of military communications equipment maker Harris Corp. (HRS + $13.40 to $168.27) and defense contractor L3 Technologies Inc. (LLL + $19.02 to $214.80) are rallying on news that the two companies have agreed to merge to create the sixth largest defense company in the United States. Under the terms of the deal L3 shareholders will receive 1.30 shares of Harris common stock for each share of L3 common stock. The companies said that they expect the deal to be accretive in first full year following the close of the transaction with the combined company expected to generate net revenue of approximately $16B, EBIT of $2.4B billion and free cash flow of $1.9B. HRS calls are outnumbering puts 6:1 with the November 16th 170.00 call topping the most actives list (volume is 413). LLL puts are outpacing calls better than 2:1 with the November 16th 200.00 put garnering the most attention from traders (volume is 705). Note: Concurrent with the announcement, both HRS and LLL reported quarterly earnings results.

Also trading to the upside is Ralph Lauren Corp. (RL + $3.61 to $125.03) after J.P. Morgan upgraded the luxury apparel maker to “Overweight” from “Neutral” and raised their price target to $150.00 from $145.00. J.P. Morgan analyst Matthew Boss said he expects the company’s EPS growth profile to accelerate to the low teens. Calls are outnumbering puts roughly 4:3 with the October 19th 130.00 call being the most actively traded contract (volume is 115).

Lastly, shares of Lululemon Athletica Inc. (LULU + $0.67 to $144.38) are trading modestly higher after Wedbush Securities upgraded the athleisure retailer to “Outperform” from “Neutral” with a $176.00 price target (note: back on October 2nd Wedbush increased their price target from $110.00 to $176.00 on the stock). Wedbush analyst Jen Redding cited data analytics and technology and e-commerce strength. Calls are outnumbering puts roughly 5:4 with the November 16th 140.00 put leading the way (volume is 481).  

New 52-week highs (11 new highs today): Air T Inc. (AIRT - $0.94 to $42.50), Krystal Biotech Inc. (KRYS + $3.96 to $20.10), Youngevity International Inc. (YGYI + $2.45 to $15.75)

Notable Call Activity

Some unusual call activity (14:1 over puts) is being seen in Las Vegas Sands Corp. (LVS - $0.02 to $56.13) which is primarily being driven by activity on the November 30th 58.00 call (volume is 2,501 vs. open interest of 5) and the November 23rd 58.00 call (volume is 2,500 vs. open interest of 2,512). Nearly all of the volume on these two contracts consisted of a 2,500 block that was sold on the Nov 23rd contract for $1.85 and a 2,500 block that was simultaneously bought on the Nov. 30th 58.00 call for $2.85. Based on the open interest data it appears that a previously held long 2,500 position on the 58.00 strike was rolled out from the November 23rd to the November 30th expiration which suggests that the block trader is still bullish on LVS, but wants a little more time for the bullish thesis to potentially play out.   

Today’s Bearish Activity 

Moving lower this morning is Bank of America Corp. (BAC - $0.76 to $27.70) even though the second-largest U.S. lender reported better-than-expected quarterly earnings results earlier this morning. Third quarter earnings were$0.66 per share ($0.04 beat) on revenue of $22.78B (above the $22.63B expected) as average loans and leases came in at $930.7B (down from the prior quarter but higher year-over-year). The stock is trading at a three-month low this morning. Call volume is dominating (roughly 5:1 over puts) which is being driven by activity on the October 19th 29.00 call (volume is 62,759).

Also trading to the downside this morning is Netflix Inc. (NFLX - $9.90 to $329.65) after the Internet television network received a couple of price target cuts earlier this morning. Raymond James lowered their price target to $400.00 from $445.00 while retaining their “Outperform” rating, citing valuation. Goldman Sachs cut their price target to $430.00 from $470.00 citing “contraction in broader internet multiples”. Earlier in the trading session the stock came within $0.15 of its 200-day Simple Moving Average (SMA) of $326.78. Calls are outnumbering puts roughly 4:3 with the October 19th 400.00 call getting the most attention from traders (volume is 2,950).  

New 52-week lows (137 new lows today): Bluebird Inc. (BLUE - $1.73 to $124.36), KB Home Inc. (KBH - $0.32 to $20.37), KLA-Tencor Corp. (KLAC - $1.37 to $91.82), Wynn Resorts Ltd. (WYNN - $2.27 to $114.31)

Notable Put Activity

Some unusual put activity (33:1 over calls) is being seen in Colgate-Palmolive Co. (CL + $0.11 to $62.65) which is being driven by multiple block trades earlier this morning:

  • A 12K block was sold on the October 19th 65.00 put for $2.70 (open interest is 16,098) and another 12K block was simultaneously bought on the November 16th 65.00 put for $3.25 (open interest is 2,303). Based on the open interest figures, it appears that a previously held long 12K position was rolled out from the Oct 19th to the Nov 16th expiration which suggests that the block trader is still bearish on this name.
  • (Separately) A 2,500 block was sold on the November 2nd 64.50 put for $2.70 (open interest is 2,505) and another block of the same size was simultaneously bought on the November 2nd 62.50 put for $1.60 (open interest is 6). Based on the open interest figures, it appears that a previously held long 2.5K position was rolled down from the 64.50 to the 62.50 strike, which suggests that the block trader is still bearish on this name.

Note: Shares of CL have lost ~6.4% this month and are scheduled to report Q3 earnings on Oct. 26th.  

Volume Signals     

Some unusual block activity is being seen in the iShares Russell 2000 ETF (IWM + $0.40 to $154.00) as the following trades took place earlier this morning:

  • A 44.51K block was sold on the December 21st 172.00 call for $0.18 (open interest is 62,677).
  • A 44.51K block was simultaneously bought on the December 21st 171.00 call for $0.24 (open interest is 1,773).

Based on the open interest figures, it appears that a previously held long 44.51K call position was rolled down (from the 172.00 to the 171.00 strike) which suggests that the block trader is still bullish on this ETF, though perhaps not as bullish as when the position was established.

Also seeing some large block trades is Range Resources Corp. (RRC + $0.65 to $17.41) as a 20.36K block was sold on the January 2020 13.00 put for $1.19 (open interest is 4,659) and a 20.61K block was simultaneously bought on the January 2020 25.00 call for $1.40 (open interest is 122,144). It’s difficult to be certain, but it appears that a (bullish) ratio risk reversal was established for a net debit of ~$0.22, which would suggest that the block trader believes that RRC will close above the break-even price of $25.22 at expiration.  

Bunge Limited (BG + $0.72 to $67.94): Option volume is running at over 4x the daily average of 773 contracts which is primarily being driven by activity on the January 2019 82.50 call. Volume on this contract is 3,505 (vs. open interest of 287) which nearly entirely consisted of two large blocks (2,500 & 1,000) that were bought for $0.35 when the bid/ask spread was $0.25 x $0.50. We know these are new positions given the open interest figure and we can assume the intent is bullish in nature since the trades took place above the midpoint of the bid/ask spread.

Gauging Volatility

The CBOE Volatility Index (VIX - 0.34 to 20.97) has been on both sides of the unchanged line today as U.S. equity markets are mixed around the mid-day mark today (DJI + 8, SPX - 5, COMPX - 35). VIX option volume has been on the heavy side today at 767,785 contracts (#2 on the top 10 most actives list) and the activity has been call-biased (nearly 3:1 over puts). The most actively traded contract is the November 21st 20.00 call as volume is 82,429 versus open interest of 325,323.

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.

Looking to the Futures
Trader’s Outlook for October 12, 2018: Volatility likely to persist as we dive into Q3 earnings next week

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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.
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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