Today's Options Market Update

Stocks Start the Week in Profit Taking Mode

February 20, 2024 Nathan Peterson
Stocks start the holiday-shortened week in the red as investors take profit in the technology sector ahead of tomorrow's earnings release from Nvidia.

After the long weekend, investors return today staring down earnings from the nation's biggest retailers and an update on the Federal Reserve's rate path perspective. There's also a mega-cap sighting Wednesday afternoon when semiconductor giant Nvidia (NVDA) shares its latest results.

Before that, big merger news flashed as Capital One (COF) said Monday it plans to acquire Discover Financial Services (DFS) for $35.3 billion in a deal involving two of the biggest U.S. credit card companies. It's unclear if the deal can get past regulators, but if it does, it would add hundreds of millions of cardholders to Capital One.

It was a heavy weekend for mergers, with Walmart (WMT) announcing the purchase of Vizio (VZIO), basically meaning Walmart is going into the TV business. Walmart and Home Depot (HD) reported earnings today. Shares of Walmart ticked higher in premarket trading while Home Depot shares slumped.

Beyond those two, the major U.S. indexes stayed red early Tuesday in follow-through from Friday's soft close that ended a five-week winning streak on Wall Street. U.S. consumer and wholesale inflation readings put the rally genie back in the bottle. Treasury yields fell this morning, but S&P 500 volatility jumped, possibly reflecting growing uncertainty.

Minutes from the January Federal Open Market Committee (FOMC) meeting tomorrow might feel a bit dated, reflecting opinions from before last week's surprisingly hot consumer and producer price data. The two reports helped lift Treasury yields to two-month highs, with both the Consumer Price Index (CPI) and Producer Price Index (PPI) coming in above expectations.

Lots of data loom between now and the March 19-20 FOMC meeting but hope for any rate cuts before June took a body blow last week.

"The PPI report reiterated that the path to 2% inflation is likely to be a long and bumpy road," said Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research, referring to the Fed's 2% inflation goal. Core CPI grew 3.9% year-over-year in January, unchanged from December.

The sizzling inflation data sparked debate about progress on the price front and whether the economy might be overheating again.

For possible clues, consider monitoring the CME FedWatch Tool. So far, it shows no probability of any future rate hikes, but if concerns mount, some traders might lean that way. Another metric is Q1 Gross Domestic Product (GDP) estimates. The Atlanta Fed's GDPNow tool was unchanged at 2.9% as of Friday, and down sharply from late January. Any rebound could indicate that GDP-related data remain resilient, possibly contributing to overheating fears.

With inflation and rates high on the list of worries, technology shares lost ground late last week and continue to look soft this morning. Tomorrow's Nvidia results could help set the course in coming days (see more below).

The 10-year Treasury note yield ($TNX) is lower by ~4 basis points to 4.254%. The U.S. Dollar Index ($DXY) is lower by 0.34 to 103.96. The Cboe Volatility Index® ($VIX) has been in positive territory all day today and was last seen higher by 1.13 at 15.37. WTI Crude Oil (/CL) is trading lower by ~0.37% today to $78.90 per barrel. Gold prices have traded in a range of $2,015.80 to $2,030.55 and were last seen trading higher by ~0.42% to $2,025.80/oz. Natural Gas prices have traded in a range of $1.522-1.616 so far today and were last seen trading lower by 1.43% to $1.586/MMBtu.

Source: Schwab Center for Financial Research

Today's Bullish Activity

Gapping up to all-time highs this morning is Dow-component Walmart Inc. (WMT + $8.70 to $179.06) after the retail giant reported Q4 earnings of $1.80 per share, excluding non-recurring items ($0.16 beat) on revenue that rose 5.7% year-over-year to $173.4B (above the $170.85B expected). Looking ahead, the company said that Q1 EPS is expected to come in a range of $1.46-1.56 (below the $1.60 FactSet consensus estimate) with Q1 revenue expected to come in a range of $1.58-1.60B (above the $157.27B FactSet consensus estimate). Concurrent with the earnings release, Walmart said that it will buy smart-TV maker Vizio for $2.3B, or $11.50 per share in cash. Calls are outnumbering puts ~2:1 with the February 23rd 180.00 call being the highest volume contract (volume is 37,210).

Also trading to the upside this morning is Medtronic PLC (MDT + $2.08 to $86.50) after the medical device maker reported fiscal Q3 earnings of $1.41 per share, excluding non-recurring items ($0.15 beat) on revenue that rose 4.7% year-over-year to $8.09B (above the $7.95B FactSet consensus estimate). Looking ahead, the company raised its full-year 2024 (FY24) EPS forecast to a range of $5.19-5.21 (from $5.13-5.19) and FY24 revenue guidance to a range of +4.75-5.00% (from +4.75%). Puts are outnumbering calls ~3:2 with the March 28th 81.00 put leading the way (volume is 10,024).

New 52-week highs (108 new highs today): CBOE Global Markets Inc. (CBOE + $3.52 to $190.21), Merck & Co. (MRK + $0.72 to $128.51), Republic Services Inc. (RSG + $1.01 to $181.44)

Notable Call Activity

Some unusual call activity (~6:1 calls over puts) is being seen in Intel Corp. (INTC + $0.48 to $43.99) as option traders primarily target the April 19th 50.00 call. Volume on this contract is 61,611 versus open interest of 16,969, which suggests that the activity primarily represents fresh positioning. The bulk of the transactions on this contract consisted of various-sized blocks that were bought at various times primarily for between $0.80-0.90 each (including a 4,000 contract block that was bought at the ask price of $0.87), which suggests bullish intent.

Today's Bearish Activity

Moving lower this morning is Home Depot Inc. (HD - $2.66 to $359.69) after the home improvement retailer reported quarterly results and provided soft guidance earlier this morning. HD reported Q4 earnings of $2.82 per share ($0.05 beat) on revenue that fell 2.9% year-over-year (YoY) to $34.79B (above the $34.64B expected) as Q4 comparable sales decreased 3.5%. Regarding guidance, the company said that FY24 comparable sales are expected to decline 1% YoY (worse than the +0.06% LSEG estimate) and FY24 EPS to increase ~1% YoY (below the +3.62% LSEG estimate). Calls and puts are trading roughly even with the February 23rd 370.00 call being the highest volume contract (volume is 2,407).

Also trading to the downside this morning is Caterpillar Inc. (CAT - $7.14 to $314.77) after Evercore ISI downgraded the heavy machinery maker to "In-Line" from "Outperform" while bumping their price target on the stock to $338.00 from $321.00, citing valuation. Puts are outnumbering calls nearly 2:1 with the February 23rd 330.00 put leading the way (volume is 1,092).

New 52-week lows (51 new lows today): Biogen Inc. (BIIB - $0.03 to $219.05), C.H. Robinson Worldwide Inc. (CHRW - $0.24 to $72.01), Medifast Inc. (MED - $0.93 to $49.06)

Notable Put Activity

Some unusual put activity (~9:1 puts over calls) is being seen in Owens & Minor Inc. (OMI + $1.19 to $22.40) which is primarily being driven by a 1,676 contract block that was bought on the April 19th 17.00 put for $0.15 when the bid/ask spread was $0.05 x $0.20 (open interest is 1,391). We know that this block is a new position based on the open interest figure and we can assume that the intent is bearish in nature since the trade took place above the midpoint of the bid/ask spread.

Volume Signals

Carter's Inc. (CRI + $0.26 to $81.66): Option volume is running at ~11x the daily average on this apparel retailer which is primarily being driven by a 1,500 contract block that was bought on the March 15th 80.00 put at the ask price of $2.75 (open interest is 365). We know that this block is a new position based on the open interest figure and we can assume that the intent is bearish in nature since the trade took place at the ask price. The positioning comes ahead of CRI's Q4 earnings which are scheduled to be released on February 27th before the bell, so this positioning captures the potential impact of that event.

Invesco Ltd. (IVZ + $0.08 to $15.52): Option volume is running at over 7x the daily average on this asset management company which is primarily being driven by a 7,150 contract block that was sold on the April 19th 14.00 put at the bid price of $0.25 (open interest is 733). We know that this block is a new position based on the open interest figure and the positioning suggests that the block trader believes that IVZ will close above the $14.00 price level and/or is comfortable taking a long 715,000 share position in the stock at an effective purchase price of $13.75 in the event that IVZ closes below $14.00 at expiration.

AstraZeneca PLC (AZN + $0.83 to $65.10): A 15,140 contract block was seen being sold on the April 19th 62.50 put at the bid price of $0.90 earlier this morning (open interest is 1,821). We know that this block is a new position based on the open interest figure and the positioning suggests that the block trader believes that AZN will close above the $62.50 price level and/or is comfortable taking a long 1,514,000 share position in the stock at an effective purchase price of $61.60 in the event that AZN closes below $62.50 at expiration.

Gauging Volatility

The Cboe Volatility Index (VIX + 1.13 to 15.37) has been on both sides of the unchanged today (the intraday is 15.07-15.81) as equity markets are lower across the board around the mid-day mark (DJI - 50, SPX - 32, COMPX - 196). VIX option volume has been above average today at 250,883 contracts, which puts the index at the #10 spot on the “Top Volume by Underlying” list. The volume put/call ratio is currently 0.54 with the highest volume contract being the March 20th 17.00 call (volume is 17,636 vs. open interest of 240,041).