The Fed has spoken.
Traders “kinda, sorta” embraced the evolving but expected Fedspeak prepping Wall Street for its first rate hike in nearly a decade. At the closing bell, the S&P 500 was up marginally by 0.16% and finished in a volatile and extra-indecisive doji pattern on its 50-day simple moving average.
An expectant Wall Street received mostly what it thought it would from Wednesday’s FOMC meeting conclusion. Chair Janet Yellen reiterated the Fed’s commitment to monitor economic data i.e., its data dependent policy, but slipped in language of the economy having “expanded moderately.”
Equity options activity Wednesday retained its modestly bullish stance as the CBOE total put/call ratio slipped ever slightly from 0.89 to 0.85. Volume in listed equity calls and puts remained light and below average overall.
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JD.com Inc (ADR) (JD)
Chinese online direct sales provider JD.com traded against the broader market Wednesday in opening higher but closing off by 2.88% in a bearish engulfing candlestick. The action in JD shares appears to be tied to some well-deserved profit-taking, with no overt headline catalysts to account for the reversal.
Option volume in JD.com swelled by nearly 800% to a bit more than 181,000 contracts while trading was evenly split with a modest advantage of 52% going to the calls. In keeping with those two factors, the at-the-money and expiring Jun $35 strike saw very even “straddle-like” activity of about 36,000 contracts apiece.
With two trading days to go, the June $35 straddle finished at $1.20 with intrinsic value of 44 cents as shares of JD closed at $35.44.
Oracle Corporation (ORCL)
In front of earnings, a five-month high and best finish of 2015 within a seven-month base in Oracle stock drew in traders to the call side by roughly a 3-to-1 margin on 6 times its average contract count with total volume of 154,000.
Most active on the day, the well out-of-the-money Jul $48 call traded a bit more than 22,000 contracts compared to open interest of 3,200. The call finished at 22 cents with shares up 0.6% at $44.91.
After hours, call buyers (among other bulls) were disappointed. Noting a strong U.S. dollar as problematic, Oracle came up light on sales of $10.71 billion vs. estimates of $10.93 billion and missed profit views by 8 cents on earnings of 78 cents per share.
In the aftermath of its earnings release, shares of ORCL were under pressure by 6% at $42.
General Electric Company (GE)
Finally, a select group of traders will have to wait and see if GE actually brought “good things to life.” Unusually heavy volume of 674,000 contracts and almost 15 times its normal options activity was also incredibly lopsided, with calls accounting for 97% of the trading.
Far from bullish, the bulk of this less-extraordinary buying and selling was tied to arbitrage-like activity wherein professional traders vie for getting away with GE’s 23-cent dividend with virtually no risk.
The most straightforward example of this kind of option-based dividend play is a deep buy-write. If a trader established a buy-write Wednesday in a deep call for even money with oodles of open interest and didn’t receive an assignment notice from the Options Clearing Corp overnight, they have effectively sold a synthetic put for 23 cents.
The dividend is effectively a wash on the long stock, but the call loses 23 cents — for the seller and as part of a buy-write, this amounts to a gain of 23 cents.
Selling a GE put synthetically for 23 cents may not sound like a big deal, but when the strikes involved reflect actual put markets that are worthless (or clearly worth less than 23 cents and about to expire) it is potentially huge if the trader gets away with a bunch of unassigned contracts.
In GE, two of the big plays were in the Jun $26 call and Jun $25 call. Volume of 81,500 and 53,100 compared to open interest of 31,000 and 21,500 respectively. The real put in both strikes are offered at 1 cent and expire Friday.
The largest pocket of dividend-related activity though was out in the Jan $20 call. A total of 188,000 contracts traded relative to open interest of 24,400, while the corresponding put maintains a market of 11-cent bid, at 20 cents.
This “dividend” buy-writer still requires a good deal of Lady Luck. The trader needs a (forgetful) holder of a long call in the Open Interest pool to not exercise their call for the dividend to escape with the 23-cent buy-write. Failing that, the trader is assigned and has no position the next day, but could be facing some potentially large commission bills that still need to be paid.
Disclosure: As of this publishing, investment accounts under Christopher Tyler’s management do not maintain positions in any of the securities or their derivatives mentioned. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
