Today's Options Market Update

Stocks Mixed to Start the Week, Retail Earnings on Deck

May 28, 2024 Nathan Peterson
Stocks are mixed, led by relative strength in technology, as investors await several retail earnings reports due later this week.

Summer is here (unofficially) and the last of the mega caps have reported quarterly results. That means it's time to go shopping (metaphorically), with a slew of retailer earnings awaiting investors after the long holiday weekend.

At least a half dozen major retailers are expected to report results this week, including Costco Wholesale (COST) and Kohl's (KSS), as the first-quarter earnings season winds down. Any company will have a tough time upstaging mega cap Nvidia (NVDA), whose explosive earnings growth helped lift the Nasdaq Composite® ($COMP) to a record high last week.

The S&P 500® index (SPX) rose slightly in premarket trading early Tuesday after posting its fifth consecutive weekly advance, albeit barely: The benchmark edged up about 0.03% after rebounding from last Thursday's selloff, clawing into positive territory thanks to info tech strength. That same tech strength, driven partly by Nvidia (NVDA), sent the Nasdaq Composite to new all-time highs Friday.

During this shortened week following yesterday's Memorial Day holiday, investors have plenty of data to keep them busy, starting with May consumer confidence soon after the opening bell today and a host of Federal Reserve speakers. Recent U.S. economic numbers have mostly been on the softer side, but gross domestic product (GDP) and Personal Consumption Expenditure (PCE) prices later this week could factor into the Fed's updated rate projections due June 12.

At the same time, eyes remain on U.S. Treasury yields, which are rangebound. The benchmark 10-year Treasury note yield was relatively steady this morning and is close to the mid-point of its three-month range, just under 4.5%. Earlier today, in a CNBC interview from London, Minneapolis Fed President Neel Kashkari said "many more months of positive inflation data" would be needed to give him confidence that it's time to dial back interest rates, and he didn't rule out a hike if inflation fails to improve further.

However, Kashkari doesn't have a vote on the rate-setting Federal Open Market Committee (FOMC) this year.

Two Treasury auctions and a speech by Fed Gov. Lisa Cook are also on today's schedule.

Morning Rush

The 10-year Treasury note yield ($TNX) is higher by ~4 basis point to 4.51%.

The U.S. Dollar Index ($DXY) is down 0.11 at 104.48.

The Cboe Volatility Index® ($VIX) has been in positive territory all day today and was last seen higher by 0.73 at 12.66.

WTI Crude Oil (/CL) is higher by ~2.25% at $79.48 per barrel.

Gold prices have traded in a range of $2,356.90 to $2,388.00 and were last seen trading ~0.85% higher to $2,377.10/oz.

Natural Gas prices have traded in a range of $2.475-2.582 so far today and were last seen trading slightly lower to $2.511/MMBtu.

Bitcoin (/BTC) is currently down roughly 2% to $67,906.70 today.

Source: Schwab Center for Financial Research

Today's Bullish Activity

Leading the percentage gainers list this morning is Insmed Inc. (INSM + $23.34 to $45.34) after the biopharmaceutical company announced that its experimental lung disease drug (brensocatib) met its primary goal in a late-stage study. Brensocatib is being developed to treat patients with non-cystic fibrosis bronchiectasis, a chronic lung condition where the walls of the airway are widened due to inflammation and infection which affects ~450,000 patients in the U.S. Insmed said that it plans on filing a marketing application for brensocatib with the U.S. FDA in Q4 of this year and expects to launch the drug in mid-2025. Puts are outnumbering calls ~4:3, but the July 19th 45.00 call is seeing the most action from traders (volume is 3,779).

Also trading to the upside this morning is Autoliv Inc. (ALV + $2.05 to $127.78) after UBS upgraded the Swedish auto parts maker to "Buy" from "Hold" and lifted its price target on the stock to $141.00 from $102.00. Analysts at UBS cited resilient earnings, noting that ALV is less prone to sector challenges such as intense capital allocation or China underexposure. Option volume is relatively light with the September 20th 130.00 call being the highest volume contract (volume is 22).

New 52-week highs (121 new highs today): Crocs Inc. (CROX + $4.53 to $153.45), First Solar Inc. (FSLR + $0.33 to $277.07), Micron Technology (MU + $1.85 to $131.34)

Notable Call Activity

Some unusual call activity (~100:1 calls over puts) is being seen in mortgage REIT Chimera Investment Corp. (CIM + $0.28 to $11.98) as option traders primarily target the September 20th 15.00 call. Volume on this contract is 4,000 versus open interest of 1, so it's likely that nearly all of the volume represents fresh positioning. The bulk of the transactions consisted of various-sized blocks that were bought at various times for between $0.13-015 each when the bid/ask spread was $0.05 x $0.15, which suggests bullish intent.

Today's Bearish Activity

Shares of cybersecurity firm Zscaler Inc. (ZS - $7.40 to $164.23) are trading at a seven-month low this morning following two analyst downgrades – Rosenblatt Securities lowered their rating to "Neutral" from "Buy" and put a $190.00 price target on the stock while Wells Fargo cut their rating to "Equal Weight" from "Overweight" and slashed their price target to $182.00 from $275.00. Rosenblatt analyst Catherine Trebnick believes ZS will report a solid quarter on Thursday (May 30th) when the company releases earnings but has concerns about the sustainability of revenue growth heading into 2025. Calls are slightly outnumbering puts with the May 31st 150.00 put being the highest volume contract (volume is 442).

Also trading to the downside this morning is online betting firm DraftKings Inc. (DKNG - $4.84 to $35.97) after the Illinois Senate passed its 2025 budget which included a sports-betting tax hike. The new legislation would make the sports gambling tax rate, which is currently 15%, to a new graduated format that would be as high as 40% on an adjusted gross revenue from gaming companies like DraftKings. Shares of DKNG are currently trading below the 200-day Simple Moving Average (SMA), which is the first time the stock has pierced this MA since January of 2023. Calls are slightly outnumbering puts, but the May 31st 38.00 put is topping the most actives list (volume is 7,720).

New 52-week lows (58 new lows today): Becton Dickinson & Co. (BDX - $0.98 to $227.81), Boston Beer Company (SAM - $4.12 to $256.63), Epam Systems Inc. (EPAM - $0.27 to $179.84)

Notable Put Activity

Some unusual put activity (~12:1 puts over calls) is being seen in the iShares MSCI India ETF (INDA - $0.48 to $53.58) which is primarily being driven by activity on the July 19th 53.00 put. Volume on this contract is 7,576 (vs. open interest of 2,083), which included a 3,692 contract block that was bought for $1.21 when the bid/ask spread was $1.10 x $1.25. We know that this block is a new position based on the open interest figure and we can assume the intent is bearish in nature since the trade took place above the midpoint of the bid/ask spread.
 

Volume Signals

The Cooper Companies Inc. (COO - $3.49 to $91.40): Option volume is running at over 6x the daily average on this contact lens maker which is primarily being driven by a couple of large blocks that were seen simultaneously trading on the June 21st expiration earlier this morning:

  • 100.00 call (open interest is 776): A 1,500 contract block was bought for $0.53 when the bid/ask spread was $0.00 x $0.90.
  • 90.00 put (open interest is 1,657): A 1,500 contract block was bought for $1.80 when the bid/ask spread was $1.55 x $1.85.

Assuming both of these blocks are new positions, it appears that a long strangle was established for a net debit of $2.33 (x 1,500 contracts x 100 multiplier, excluding commissions). The positioning suggests that the block trader believes that COO will either close above the upper break-even price of $102.33 or the lower break-even price of $87.67 at expiration. COO is scheduled to report fiscal Q2 earnings on Thursday (May 30th) after the bell, so this positioning captures the potential impact of that event.

SMART Global Holdings Inc. (SGH + $0.89 to $21.43): Option volume is running at over 6x the daily average on this memory-focused semiconductor company which is primarily being driven by activity on the June 21st 22.50 call. Volume on this contract is 1,047 versus open interest of 497, so we know that the volume primarily represents fresh positioning. The bulk of the transactions consisted of various-sized blocks that were bought at various times for between $0.70-0.85 each, which suggests bullish intent.

SPDR Select Sector Financials ETF (XLF - $0.34 to $41.26): Several large blocks were seen simultaneously trading on the September 30th expiration earlier this morning:

  • 45.00 call (open interest is 142): A 25,000 contract block was sold for $0.27 when the bid/ask spread was $0.26 x $0.29.
  • 40.00 put (open interest is 201): A 25,000 contract block was bought for $0.68 when the bid/ask spread was $0.66 x $0.69.
  • 36.00 put (open interest is 59): A 25,000 contract block traded for $0.19, directly in the middle of the $0.18 x $0.20 bid/ask spread.

We know that all of these blocks are new positions based on the respective open interest figures and it appears that a bearish risk reversal (using the 45.00 C + 40.00 P) was established, along with a downside put purchase for protection, for a combined net debit of $0.22 (x 25K contracts x 100 multiplier, excluding commissions). The positioning is bearish in intent and suggests that the block trader believes that XLF will close below the break-even price of $39.78 at expiration.

Gauging Volatility

The Cboe Volatility Index (VIX + 0.73 to 12.66) has been in positive territory all day today (the intraday is 12.36-12.93) as equity markets are mixed around the mid-day mark (DJI - 175, SPX + 4, COMPX + 95). VIX option volume has been above average at 467,232 contracts, which puts the index at the #8 spot on the “Top Volume by Underlying” list. The volume put/call ratio is currently 0.29 with the highest volume contract being the September 18th 20.00 call (volume is 50,887 vs. open interest of 37,342).