Barring a rally today, the major market indices are poised to post their fifth loss in the past six weeks. The holiday-shortened week hasn’t done stocks any favors in the U.S., with global economic concerns and a strong U.S. dollar applying pressure to sentiment. Options traders are also feeling the pinch, with puts once again pushing for popularity on the CBOE, as the exchange’s put/call volume ratio rose for a second day to perch at 0.76.
Banking concern Bank of America Corp (NYSE:BAC) remained among the most active options on Wednesday, with call activity being driven by a pair of bullish earnings assessments. Meanwhile, Micron Technology, Inc. (NASDAQ:MU) continued to attract a wealth of attention prior to its quarterly earnings report, which is receiving mixed reviews after an initial postmarket rally Wednesday. Finally, Brazilian oil Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR, NYSE:PBR.A) was up sharply after receiving a funding deal from China.
Bank of America Corp (BAC)
Earnings expectations are low for the banking sector heading into the next round of quarterly earnings reports, but Goldman Sachs Group Inc and Deutsche Bank AG believe that Bank of America could be among the bright spots for the sector. While expectations are for flat to lower earnings year-over-year, Deutsche Bank’s Matt O’Connor cited BofA as a top pick and “the best large bank play” due to a stronger U.S. economy.
While BAC stock has been beaten down recently, this hasn’t stopped options traders for expressing a preference for call options on the stock. Yesterday’s bullish analysts notes fueled the fire, with 54% of the 254,819 contracts trading on BAC crossing on the call side. Peak near-term call open interest for BAC currently rests at the April $16 strike, where 92,905 contracts are open. By contrast, 84,489 puts reside at the April $15 strike.
Petroleo Brasileiro Petrobras SA (ADR) (PBR)
Plagued by a bribery scandal, shares of Petroleo Brasileiro Petrobras SA (ADR) — or simply Petrobras — have been beaten and battered during the past several months. The stock caught a break in yesterday’s trading, however, after news hit that the company has secured a $3.5 billion financing deal with China Development Bank as part of a cooperation agreement for 2015 and 2016. Short interest rose to 109.9 million shares in the most recently reporting period, totaling five times year-ago levels, creating a bit of a short squeeze situation following yesterday’s rally.
Despite the potential upside, puts were the investment vehicle of choice on Tuesday. In fact, 69% of the record 224,148 contracts that traded on PBR stock crossed on the put side.
There are two potential explanations for this seemingly bearish activity:
- Traders could be closing out existing positions in order to lock in profits.
- Purchasing puts and PBR stock at the same time creates a bit of an insurance-like play known as a married put, where the put protects against any downside in the underlying purchased shares.
Micron Technology, Inc. (MU)
I’ve covered Micron extensively over the past couple of days, offering potential trading ideas and detailing the stock’s heavy options volume. The company finally released a solid second-quarter report, with sales arriving at $4.2 billion on adjusted earnings of 81 cents per share. Both figures topped the consensus estimate.
As I noted in yesterday’s earnings preview, MU stock’s reaction would be dependent largely on guidance. And Micron failed to deliver in its conference call, forecasting third-quarter earnings of 70 cents per share on revenue of $3.9 billion, well below analyst expectations of 77 cents per share on $4.3 billion in sales.
MU stock jumped nearly 6% ahead of the conference call, but quickly dipped into negative territory in after-hours trading following guidance. The shares have battled back to breakeven heading into the open, and today’s session could be quite volatile as a result.
On the options front, calls were once again marginally popular ahead of the report. Just over half of the 235,608 contracts trading on MU stock were of the call variety. Look for similar activity to take place today, with the weekly April 2 series options to see heavy volume ahead of this afternoon’s expiration.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
