U.S. stock futures are mixed heading into the open this morning, as Wall Street eyes 20,000 for the Dow Jones Industrial Average and rising interest rates. The 20K milestone lies just overhead for the Dow, but caution ahead of this week’s Federal Open Market Committee (FOMC) meeting on interest rates could delay any record breakout. The Federal Reserve is expected to lift rates to between 0.5% and 0.75% on Wednesday, marking the first rate hike this year.
Against this backdrop, futures on the Dow are up 0.06%, while S&P 500 futures have slipped 0.02% and Nasdaq-100 futures are off 0.35%.
On the options front, volume was well above normal on Friday, with 20.5 million calls and 14.6 million puts changing hands on the session. On the CBOE, the single-session equity put/call volume ratio continued to rebound from Wednesday’s annual low, arriving at 0.53 on the session. The 10-day moving average, meanwhile, finished at a four-month low of 0.58 for the second consecutive session.
Among Friday’s volume leaders, Bank of America Corp (NYSE:BAC) calls were extremely popular ahead of this week’s FOMC meeting, while Apple Inc. (NASDAQ:AAPL) also saw a jump in call activity after the shares reclaimed their 50-day moving average. Finally, Seadrill Ltd (NYSE:SDRL) soared on connections to president-elect Donald Trump’s pick for Secretary of State.
Bank of America Corp (BAC)
BAC stock has soared nearly 40% since the November election, as investors look to the incoming Trump administration for a loosening of financial regulations and pressure on the Fed to raise interest rates.
This week, the Fed is widely expected to lift the Fed funds rate for the first time this year, and BAC options traders are looking for solid gains across the board for the shares as a result — even after the stock’s impressive Trump-bump.
Specifically, BAC saw more than 1.8 million option contracts change hands on Friday, with calls snapping up a whopping 78% of the day’s take — call activity typically reserved for dividend capture strategies. Underscoring the bullish nature of Friday’s activity, data from Trade-Alert.com highlights a bullish BAC call ratio spread in the March series.
The first leg of this trade comprised roughly 55,000 contracts at the March $25 call, with the contracts trading for the ask of 68 cents, while the second leg totaled roughly 111,000 contracts at the March $27 call, crossing at the bid of 28 cents. In total, the ratio spread entailed a layout of 12 cents, or $12 per contract, with the trader set to see a maximum profit of $188 per contract if BAC closes at $27 when March options expire.
Apple Inc. (AAPL)
After being pummeled in the wake of Trump’s election victory, tech stocks are making a comeback, and AAPL stock is helping to lead the way. AAPL is up roughly 9.5% since hitting a near-term low on Nov. 14, with Friday’s rally taking the shares north of their 50-day moving average for the first time since Nov. 1. With technical traders starting to shift into buy mode on the breakout, AAPL stock should have more upside in the weeks to come.
Options traders are also shifting back into the bullish spectrum. On Friday, AAPL stock saw nearly 1.7 million contracts change hands, with calls snapping up 68% of the day’s take — well above the stock’s average call percentage in the 62%-63% range.
Speaking of bullish expectations, December options traders have their sights set on the $115 level for AAPL this Friday.
More than 216,000 calls are open at the Dec 16 series $115 strike, with AAPL needing roughly a 1% move by Friday to overtake this heavy call accumulation. Depending on Wall Street’s direction following the FOMC meeting, a move above $115 is entirely possible for AAPL.
Seadrill Ltd (SDRL)
Financials aren’t the only stocks surging in the wake of the November elections. The oil and oil drilling sectors have also experienced a renaissance of sorts, and few have seen the same surge in attention afforded Seadrill. But SDRL stock received a serious shot in the arm last week, after it was reported that Trump selected Exxon Mobil Corporation (NYSE:XOM) Chairman Rex Tillerson for U.S. Secretary of State. According to Trump, Tillerson “does massive deals in Russia,” with XOM and SDRL partnered in developing the Kara Sea project — a project that was halted by Russian sanctions.
The potential impact for SDRL stock is “huuuge,” and options traders are rushing to speculate on the stock’s direction. On Friday, SDRL saw a near-term high 210,000 contracts change hands, though most appeared to be seeking protection and not chasing a continued rally. Specifically, calls only made up 49% of the day’s take.
What’s more, SDRL is trading well north of peak December call open interest at the $3 strike, totaling 7,595 contracts. Meanwhile, peak put OI numbers 11,000 contracts at the $2 strike, suggesting that SDRL options traders are selling premium or buying protection against a reversal in the shares.
Either way, speculative traders are approaching SDRL with a definite air of caution.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
