The storied Wall Street adage “Sell in May and Go Away” took another step in confirming a less bullish period is underway Wednesday as the S&P 500 ETF (SPY) dipped by 0.56%.
The second straight session of profit-taking put the index close to a flat performance in what’s been a roller coaster ride thus far in 2016. However, the S&P 500 futures are actually up 0.34% premarket at last check.
As for the NASDAQ Composite futures, they’re up 0.35% premarket, and the Dow Jones Industrial Average futures are up 0.35%.
The Market Vectors Biotech ETF (BBH) tumbled 2.33% on Wednesday. Leading the way, biotech giant Biogen Idec’s (BIIB) sank 2.9% following news it will spin off its hemophilia business, which Moody’s stated would be credit negative for the company.
Behind Wednesday’s glibber but still modest “risk-off” market behavior, investors were greeted by a weaker-than-expected ADP report for May and suggestive of slow economic growth. ADP data of 156,000 failed to meet analyst views of 195,000.
For a Street addicted to low rates, the good, but apparently out-of-favor, narrative is Wednesday’s data may raise the specter of a weak nonfarm payrolls report on Friday and help an ultra-accommodative Fed continue to play nice.
Conversely, a strong intraday expansion reading of 55.7 for April’s ISM services data for April brought in a bid for equities already underwater — though, the surface or breakeven mark was never breached by out-of-breath bulls.
Equity Options Most Active
Equity options activity Wednesday retained its modestly bearish stance as the CBOE total put/call ratio of 1.09 compared to Wednesday’s 1.10 reading. Contract volume for all listed products came in at 3.76 million, representing a small increase over the prior session’s 3.64 million.
From Wednesday’s options activity, three of the session’s companies that experienced more unusual volume were Alibaba Group Holding Ltd (BABA), Anheuser Busch Inbev SA (ADR) (BUD) and JD.com Inc(ADR) (JD). Let’s take a more in-depth look at each.
Alibaba Group Holding Ltd
Alibaba reported earnings this morning. In front of the report, option volume in BABA grew to more than 5 times the daily average.
An ending tally of 135,000 contracts saw calls accounting for 61% of the trading in BABA. Most active, investor favor landed on the June $77.50 call. Volume of 12,300 compared to open interest of just over 8,000 and indicative of new positions.
The regular BABA May $80 call and Weeklys May 6 and June 3 $80 calls also saw heavy activity of more than 10,000 contracts apiece. Only the latter June call with negligible open interest can be determined to be opening of positions by traders.
While dominated overall, the BABA June $80 put proved popular with at least one trader as more than 10,000 contracts changed hands.
Anheuser Busch Inbev SA (ADR)
Anheuser Busch also witnessed concentrated activity in the far out-of-the-money BUD June $135 call and September $140 and $145 calls.
The options action resulted in a lopsided put/call ratio of nearly 25 and aggregate volume of over 20,000 in the three BUD contracts.
A roll or diagonal strategy in the June $135 and September $140 calls may be responsible for some of the trading activity. Fairly equal volume of around 5,000 apiece is conspicuous, but larger open interest makes the directional interpretation and intentions for BUD stock less clear.
Regarding the higher-strike BUD September $145 call, volume is clearly opening as 10,000 contracts traded compared to open interest of 1,800. However, a ratio back or front spread in conjunction with the September $140 call means a critical determination of who did what, to whom, isn’t entirely certain.
JD.com
Last up, JD.Com options trading surged by more than seven fold to nearly 80,000 contracts.
Traders responsible for the activity were clearly bullish in running up the call tally by roughly 15-to-1 over puts, with the bulk of the activity centered on the JD Weeklys May 13 $25 call.
Earnings aren’t for another week and company-specific news attributable to the trading was lacking. That didn’t prevent buy-side order flow from bidding up JD premiums to their highest since early February.
For its part, the wildly popular JD Weeklys May 13 $25 call closed at $1.20 on well-bid implied volatility of 93% and volume of nearly 68,000.
Based on Wednesday’s at-the-money options premiums, traders expect JD has a 68% chance of remaining within a range of around $20.75 to $27.75 through next Friday. By the looks of it though, our guess is not all our options trading peers use the same calculator.
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.
