Monday’s gains were all but wiped away on Tuesday after China shocked Wall Street by devaluing the yuan by nearly 2%. China’s move, in response to weak trade and inflation, sparked a selloff in crude, while gold and silver rallied. On the day, the S&P 500 dropped nearly 1% to close back below 2,100.
Option volume rebounded due to the turmoil on Wall Street, rising above typical Summer levels, with puts gaining favor. Overall, the CBOE’s single-session equity put/call volume ratio whipsawed higher from Tuesday’s low to end at 0.79, dragging the 10-day moving average back to a two-week high of 0.72.
In equity options activity, Apple Inc. (NASDAQ:AAPL) saw a spike in options volume after Jefferies cut its price target on AAPL stock. Meanwhile, currency news out of China plagued shares of Alibaba Group Holding Ltd (NYSE:BABA), which are trading sharply lower this morning too following a weak quarterly report. Finally, Chesapeake Energy Corporation (NYSE:CHK) was suffering collateral damage from yuan devaluation as crude oil hit multiyear lows.
Apple Inc. (AAPL)
Apple shares fell more than 5% on Tuesday to tag its lowest point since late January. In addition to concerns regarding the devaluation of the Chinese yuan, Jefferies reiterated its “hold” rating on AAPL stock but cut its price target to $130 from $135. Jefferies cited uncertainty regarding iPhone demand for the downgrade.
Option volume hit levels not seen since Apple’s earnings report, with more than 1.6 million contracts changing hands on AAPL stock. Furthermore, the put/call volume spread narrowed considerably for AAPL, with calls only accounting for 55% of Tuesday’s total volume.
Eying short-term open interest levels reveals that traders are focused on the $120 and $121 call strikes in the weekly Aug 14 series, with open interest at these strikes totaling more than 22,000 contracts each. AAPL put open interest, meanwhile, has accumulated at the $111 strike in the weekly Aug 14 series, with 16,211 contracts currently in residence.
With AAPL stock trending nearly 1.5% lower in premarket trading, these $111 strike puts are very close to trading in the money.
Alibaba Group Holding Ltd (BABA)
After falling nearly 4% in Tuesday’s trading in the wake of a surprise shift in Chinese monetary policy, BABA stock is down another 5% in pre-market trading this morning. Alibaba reported quarterly earnings of 59 cents per share, topping expectations for a profit of 58 cents per share. However, growth slowed to its lowest level in three years at Alibaba, as revenue came in at $3.27 billion, well short of the Street’s target for sales of $3.39 billion.
In the options pits, more than 413,000 BABA options contracts changed hands on Tuesday, rising to a short-term high for the equity. Calls were the topic of choice, as these typically bullish bets racked up 61% of the day’s activity.
With BABA trading down near $73 at last check, the 5,083 put contracts open at the weekly Aug 14 series $75 strike are now trading firmly in the money. Meanwhile, there are 6,647 call contracts open at the Aug $80 strike that will have a hard time recovering after this morning’s losses.
Chesapeake Energy Corporation (CHK)
As oil goes, so goes Chesapeake Energy. The shares leaped higher on Monday when prospects for economic growth and demand pushed oil futures higher, but China’s abrupt currency move spoiled all that. The September contract for U.S. oil fell roughly 4.2% on Tuesday, hitting its lowest level since February 2009. As a result, CHK stock dropped about 4.7% in response.
Option volume was brisk on CHK on Tuesday, hitting a near-term record high of 245,589 contracts. Furthermore, puts dominated the landscape, snapping up 82% of the day’s take. Weekly Aug 14 series $8 strike puts (totaling 7,923 contracts) are trading just out of the money heading into the open. That said, with the week CHK stock has had, the 5,345 call contracts open at the weekly Aug 14 series $9 strike should not be written off just yet.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
