Today's Options Market Update

Stocks Near Flat Amid Rising Treasury Yields

May 17, 2024 Joe Mazzola

Rising Treasury yields kept a cap on early rally attempts as investors brace for Leading Indicators data, Fed speakers.

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Rising Treasury yields kept Wall Street subdued early Friday, but major indexes remain on pace for another weekly gain heading into Nvidia (NVDA) earnings next week. Today features two Federal Reserve speakers and Leading Indicators data but otherwise little in the way of key developments.

The 10-year Treasury note yield edged above 4.4% early Friday after falling briefly below 4.32% yesterday, and stocks remain closely linked to the yield climate. There's little data to back the selling in Treasuries, which could simply reflect ideas that this week's sharp rally got overdone. The yield remains well under last month's peaks above 4.7% but reclaimed most of the drop seen after this week's constructive Consumer Price Index (CPI) report.

Hopes for a so-called U.S. economic "soft landing" surged this month thanks to cooling jobs and inflation data, but it would be a mistake to think the economy is out of the woods. Crude oil prices remain relatively high, inflation is far from tame, and the Federal Reserve shows no signs of cutting rates anytime soon. High U.S. rates could keep the dollar elevated as borrowing costs overseas begin declining, a tough climate for U.S. exporters.

"The CPI report was good news for what it didn’t say," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research. "It’s a step in the right direction that inflation isn’t reaccelerating, but it remains elevated. We expect inflation to continue to move lower but at a bumpy pace. We expect one to two rate cuts this year depending on the data.

Morning Rush

The 10-year U.S. Treasury yield (TNX) rose two basis points to just below 4.4%.

The U.S. Dollar Index ($DXY) climbed slightly to 104.74.

The Cboe Volatility Index^® (VIX) dropped to new 2024 lows and recently traded at 12.29.

WTI Crude Oil (/CL) edged up to $79.46 per barrel.

Bitcoin (BTC) rose 1.5% to $66,267.

Source: Schwab Center for Financial Research

Today's Bullish Activity

Shares of Reddit Inc. (RDDT + $8.25 to $64.43) are jumping today, up over 14%, after the company announced a partnership with OpenAI that will bring its content to ChatGPT and other products, while also helping the Reddit add new AI features to its many forums. Bloomberg notes that Reddit will also offer its users new AI-based tools built on models created by OpenAI, which will place ads on its partner’s site. Financial terms of the deal weren’t disclosed.

Analysts appear bullish on the prospects of the partnership. Morgan Stanley notes, "The OpenAI pact is a key step forward as Reddit expands its data licensing business. We expect the deal to add $40-$50mn of high margin annual revenue." Citi commented, "OpenAI's agreement should provide ChatGPT with a continuously refreshed source of human conversation at scale."

Trading in options of RDDT rose to over 43,000 contracts in morning trading (6x daily average). Leading the way are the following trades, expirations, and strikes:

May 17th, 2024 65.00 call accounted for 3,306 contracts; open interest is 1,870 contracts.
May 17th, 2024 75.00 call accounted for 1,629 contracts; open interest is 2,832 contracts.
June 21st, 2024 10.00 put accounted for 2,090 contracts; open interest is 734 contracts.

New 52-week highs (183 new highs today): Jiade Ltd. (JDZG + $4.28 to $12.60), Despegar.com (DESP + $1.88 to $14.42), Futu Holding Ltd (FUTU + $3.62 to $81.40), Sea Ltd. (SE + $2.19 to $73.63), Trip.com (TCOM + $1.22 to $57.63)

Notable Call Activity

Unusual call activity is noted in Ouster Inc. (OUST + $2.15 to $13.81), as option traders have pushed call volume to 6,316 contracts in morning trading (16x daily average). Much of the activity stems from a call vertical spread trade in the June 21st, 2024 expiration, as traders are purchasing the 15.00/20.00 call spread. We've seen over 2,500 of these call spreads trade at $0.90, slightly above the mid-price, through multiple block trades (suggesting bullish intent). Shares have rallied over 30% since the May 9th earnings announcement and are currently trading above all major moving averages.

Today's Bearish Activity

Shares of Cracker Barrel (CBRL - $8.40 to $48.87) are down over 14%, trading at their lowest levels since December 2011, after the restaurant chain reduced its quarterly dividend to $0.25 per share. This move comes as the company reports seeing Q3 and Q4 results coming in below prior expectations due to weaker-than-anticipated customer traffic as the main driver. This has resulted in store closures and a transformation of the company's capital allocation to support increased investment in the business.

Analysts have lowered their price targets following the news. Truist cut their PT to $51 from $60. Citi cut its price target on the shares to $48 from $61.

Option trading in CBRL currently stands at 8,100 contracts, 7x the daily average, with puts outpacing call 4:1. Leading the way are the following trades, expirations, and strikes:

May 17th, 2024 47.50 put accounted for 1,126 contracts; open interest is 804 contracts.
June 21st, 2024 47.50 put accounted for 3,116 contracts; open interest is 135 contracts.

New 52-week lows (36 new lows today): DXC Technology (DXC - $3.32 to $16.36), Cracker Barrel (CBRL - $8.40 to $48.87), Legalzoom Common Inc. (LZ- $0.21 to $8.98), Cerence Inc. (CRNC - $0.62 to $4.27)

Notable Put Activity

Some unusual put activity is noted today in Patterson Uti Energy (PTEN + $0.14 to $11.20). This activity equates to over 46,808 put contracts, 5x average daily put volume and is being driven by sales in the July 19th, 2024 expiration month. Traders have sold a total of 46,672 of the 10.00 put strike through multiple block trades at an average price of $0.16 when the bid/ask was $0.15 x $1.25. This represents new positioning given there was 0 open interest coming into the day (suggesting neutral to bullish intent). Shares have traded at or slightly below the $10.00 mark on a few occasions throughout the past year before eventually rallying, including the most recent earnings report on May 1st. It is possible that traders believe that pattern will continue.

Gauging Volatility

The Cboe Volatility Index (VIX - 0.15 to 12.27) has traded on both sides of the unchanged line within a fairly muted range (the intraday range is 12.23 – 12.48) as equity markets are mixed at the midday mark (DJI + 87, SPX + 1, COMPX - 30). VIX option volume is below average today given its omission from the "Top Volume by Underlying" list. The volume put/call ratio is currently 0.38 with the highest volume contract being the May 22nd 12.50 put (volume is 21,390 vs. open interest of 63,390).

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