U.S. stock futures are trading flat to lower, as Wall Street enters a holding pattern ahead of today’s Federal Open Market Committee decision on interest rates. With a rate hike already a foregone conclusion, the Street is turning its attention to the wording of today’s Federal Reserve announcement in the hopes of garnering clues about future rate hikes. Reactions here will determine if the major market indices can push further into all-time high territory.
Heading into the open, futures on the Dow Jones Industrial Average are down 0.11%, while S&P 500 futures are down 0.14% and Nasdaq-100 futures are flat.
On the options front, volume rebounded from Monday’s low to arrive just ahead of average for the past month. Overall, about 18.9 million calls and 12.9 million puts changed hands on Tuesday.
On the CBOE, we have cause for concern. Call volume continued to be extremely brisk, with Tuesday’s activity driving the single-session equity put/call volume ratio down to 0.54 — near an annual low. But the real risk lies with the 10-day moving average, which hit a two-year low of 0.57 — indicating that we have hit an extreme degree of bullish sentiment heading into the Fed rate hike.
Turning to Tuesday’s volume leaders, we find that Bank of America Corp (NYSE:BAC) remains a driving force behind not only call volume, but call buying, as traders loaded up on BAC bullish bets just ahead of the Fed rate hike. Meanwhile, Mad Money’s Jim Cramer told CNBC that Apple Inc. (NASDAQ:AAPL) could also be a major beneficiary of a Fed rate hike due to its massive cash holdings. Finally, Microsoft Corporation (NASDAQ:MSFT) rallied on indications that disappointment with Apple’s new MacBook Pro are leading to increased Surface sales.
Bank of America Corp (BAC)
Optimism is one thing, but Bank of America options traders have taken things to a new level heading into today’s Fed decision on interest rates. BAC calls have been increasingly popular for the past week, culminating in a flood of potentially bullish bets on the stock yesterday, as traders anticipate a rally on tightening monetary policy (which should benefit the bottom line of Bank of America’s investment unit).
Overall, 1.5 million contracts traded on BAC yesterday, with calls gobbling up 77% of the day’s take in a wave of activity reminiscent of ex-dividend activity. The most impressive of yesterday’s BAC call trades, according to Trade-Alert.com, was a more than 40,000 contract bull call spread at the Jan 2018 $30/$37 strikes. The spread crossed for an ask price of $1.05, or $105 per pair of contracts, and has a maximum profit of $5.95, or $595 per pair of contracts, if BAC closes at or above $37 when these contracts expire in January 2018.
Outside of this massive BAC bull call spread, several blocks of 10,000 contracts traded on the Jan 2017 $20 put and $25 call call strikes. Interestingly, this activity appeared to be an essentially “free” synthetic long spread, with the puts crossing at a bid of 18 cents and the calls trading at an ask of 18 cents, leaving the trader with only brokerage fees to initiate the position.
Apple Inc. (AAPL)
While Apple’s options activity was far less exciting, AAPL stock still jumped more than 1.6% in the wake of a pair of bullish reports yesterday. First, AAPL was reiterated with a “buy” rating and a $124 price target at Goldman Sachs. Second, Jim Cramer told CNBC that “Apple might even benefit from a rate hike because it will be able to get a better return from its gigantic hoard of cash.”
Traders responding by sending more than 1.4 million contracts across the tape for AAPL and driving calls to account for 65% of the day’s take — just north of the stock’s daily average in the 62%-63% range.
AAPL’s rally on Tuesday took the shares north of peak Dec call open interest of 218,000 contracts at the $115 strike — a major win for Apple bulls, as these calls expire at the end of the week. Look for AAPL to see some minor headwinds as the shares attempt to move higher as these call positions unwind in the form of profit taking ahead of expiration.
Microsoft Corporation (MSFT)
Not all of Apple’s news was rosy yesterday, however. In fact, disappointment among business professionals with Apple’s new MacBook Pro appears to be driving them into the arms of Apple’s chief rival, Microsoft. “It’s the most wonderful time of the year — for Surface!” Microsoft said in a blog posting on Monday, stating its MacBook trade-in program had pushed Surface sales to their best month ever.
The news pushed MSFT stock to a fresh all-time high and drove heavy call volume on the shares. On the day, some 609,000 contracts traded on MSFT, with calls making up 75% of the overall take.
Data from Trade-Alert.com indicates that at least one trader is betting big on a continued MSFT rally with a 25,000 contract Jan 2017 $60/$65 ratio bull call spread, with 1.5 $65 strike calls sold for every one $60 strike call sold. As a result, the trade crossed at an ask price of $2.77, or $277 per pair of contracts, with a maximum profit of $2.23, or $223 per pair of contracts.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
