Stocks rallied on Wednesday, but gains were cut short due to a lack of confidence among Wall Street players.
Specifically, the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite all gained nearly 1% on the day, but were unable to overcome potentially significant technical hurdles. The 2,000 mark looms large for the S&P, while the Dow is staring up at 17,000, and the Nasdaq must contend with 4,800.
While the lack of confidence may not be readily apparent to most market watchers, options traders are be fully aware. Volume on the CBOE fell in line with the past month’s average, but the recent preference for call options fell off significantly yesterday.
In fact, the CBOE single-session equity put/call volume ratio plunged from Tuesday’s reading of 0.68 to arrive at a one-week high of 0.83, as traders expressed doubts regarding stocks’ ability to push much higher. The 10-day moving average advanced to 0.77 as a result.
Turning to equity-specific options activity, Twitter Inc (NYSE:TWTR) call volume hit a near-term peak on Wednesday after board member Evan Williams publicly backed CEO Jack Dorsey. Elsewhere, Freeport-McMoRan Inc (NYSE:FCX) saw puts dominate a spike in short-term volume after the company announced that two of Carl Icahn’s representatives would join the board of directors.
Finally, Transocean LTD (NYSE:RIG) was unable to inspire the same level of confidence among options traders on Tuesday that energy sector peer Exxon Mobil Corporation (NYSE:XOM) attracted earlier in the week.
Twitter Inc (TWTR)
In an interview on Bloomberg TV, Twitter board member Evan Williams said that, while fellow co-founder Jack Dorsey wasn’t in an ideal situation (Dorsey is currently CEO of both Square, Inc. and Twitter), he was still the best person to run Twitter.
As a result, TWTR stock surged more than 8% yesterday, with news that Saudi Prince Alwaleed bin Talal doubled his holdings over the past six months providing extra lift for the shares.
TWTR options activity has been far from bullish during the past month, with the stock’s October/November put/call open interest ratio rising to near-term highs. Yesterday’s options activity ran counter to that trend, with TWTR calls accounting for 72% of the 204,156 contracts trading on the stock.
Short-term call traders are most focused on the weekly October 9 series $30 strike, with OI totaling 6,137 contracts. TWTR is currently hovering just below $30, and could make a run at this level before Friday’s close. Still, given the stock’s recent weakness, trading short-term $30 calls appears to be a risky strategy with limited reward at this late stage of the game.
Freeport-McMoRan Inc (FCX)
FCX stock was on fire yesterday, with the shares rallying nearly 10% to eclipse their mid-September highs. Helping to drive the shares higher was news that Freeport had reached an agreement with Carl Ichan to appoint two of his representatives to the company’s board. Ichan currently holds about 8.8% of FCX shares outstanding.
Running counter to the rally, FCX puts dominated Wednesday’s trading in the options pits. Overall, puts accounted for 65% of the 271,750 contracts traded on FCX yesterday, hinting that traders were either betting against a continued rally or hedging freshly opened long stock positions. Either way, the excessive put volume speaks of a lack of confidence in future gains for FCX stock.
From a shorter-term perspective, puts have built up heavy reserves at the weekly October 9 series $12 and $12.50 strikes, with OI totaling 9,062 contracts and 6,542 contracts, respectively. At first glance, these options appear to be part of bear put spread activity, which would signal expectations for a reversal in FCX stock by Friday.
Transocean LTD (RIG)
With the dollar rising, oil supply beginning to slacken, and oil prices showing signs of recovery, energy sector stocks have had quite a week so far. For its part, RIG jumped nearly 4% higher on Wednesday, following sector peer XOM’s more than 5% gain on Tuesday. That said, option sentiment following these moves couldn’t be more different.
Following XOM’s jump, options traders revealed expectations for extended gains by piling into call options. By contrast, RIG saw record short-term put volume, as these typically bearish bets accounted for 93% of the 253,400 contracts trading on the shares yesterday.
In fact, some options traders may even be betting on a reversal for RIG before the close of trading this Friday. Specifically, weekly October 9 series open interest points to heavy put accumulations at the out-of-the-money $15.50, $14.50, and $13.50 strikes, totaling more than 5,000 contracts each. If this put activity is related (and I’m speculating here), it could signal some form of condor spread designed to profit if RIG closes between $15 and $14.50 when these options expire by the close tomorrow.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
