The major market indices returned from the July 4th holiday weekend with a headache. Stocks retreated on the day, as falling oil prices, a resounding “no” to austerity measures in Greece, and turmoil in the Chinese stock market weighed heavily on investor sentiment. Still, losses were limited, and the S&P 500 shed a mere 0.39% on the day.
In the options pits, volume was rather anemic, arriving well below even Summer volume levels. Over on the CBOE, put activity slackened, allowing the CBOE equity put/call volume ratio to dip to 0.65. The 10-day moving average held at 0.68 for the third-straight session.
In equity news, Micron Technology, Inc. (NASDAQ:MU) remains a favorite among options speculators, as traders digest reports that DRAM prices could continue to fall. Elsewhere, Chesapeake Energy Corporation (NYSE:CHK) attracted a wealth of calls even as the stock plunged on weakening oil prices. Finally, the recent volatility in the Chinese markets has bolstered options speculation in Alibaba Group Holding Ltd (NYSE:BABA).
Micron Technology, Inc. (MU)
MU stock was hit hard after Micron both missed analyst earnings estimates and offered less than reassuring guidance for the rest of the year. Adding to the company’s woes, Nomura Equity Research issued a report on MU yesterday stating that DRAM prices could continue to fall as inventory levels rise throughout the industry. Nomura reiterated its “neutral” rating with a $23 price target.
Options traders were call happy on MU stock yesterday, despite reports of a potential glut in DRAM inventories. More than 262,000 contracts traded on MU, with calls accounting for 65% of the day’s activity. Traders should keep a close eye on MU short interest levels, as rising call activity on the struggling stock could be a sign of hedging on fresh short positions.
Looking at short-term weekly July 10 series option activity, peak open interest totals 28,097 contracts at the out-of-the-money $17.50 strike. By comparison, the next most popular strike in the series is the out-of-the-money $20 call strike, where only about 9,931 contracts reside.
Chesapeake Energy Corporation (CHK)
CHK stock was smacked for a 3% loss on Monday, with shares following the rest of the energy sector lower as oil prices fell to three-month lows, threatening to approach $50 per barrel. Driving the weakness in energy prices is volatility in the Chinese markets as well as reports that Iran is looking to double its exports to 2.3 million barrels per day.
Even a bullish research note from Sterne Agee CRT wasn’t enough to bolster CHK stock. Sterne Agee upgraded CHK to “buy” from “neutral” and lifted its price target to $13 from $9 per share. Currently, CHK has an average 12-month price target of $15.50, with five “buys,” 20 “holds” and seven “sell” ratings.
Options traders were not swayed by the upgrade, with puts comprising 58% of yesterday’s 99,491 contracts in volume. That said, calls remain popular among short-term traders in the weekly July 10 series, with peak open interest totaling 2,418 contracts at the out-of-the-money $11 call strike, while another 1,080 contracts reside at the $12 call strike.
Alibaba Group Holding Ltd (BABA)
BABA stock dropped more than 2.2% on Monday, as traders fretted over recent volatility in the Chinese markets. However, China has instituted a series of unprecedented policy moves in hopes of bolstering stocks there.
Specifically, backed by China’s state-run margin finance company, brokerages and fund managers are set to buy stocks hand-over-fist in a move to support the market. A direct line of liquidity from the Chinese central bank is also expected to bolster the surge in buying activity.
On the options front, volume was light on BABA stock, with only about 86,445 contracts crossing the tape. Calls remained a favorite, however, accounting for 60% of the day’s activity. Looking at weekly activity, the July 10 series $82 call strike is the most popular at the moment, with open interest of 9,559 contracts.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
