U.S. stock futures are heading higher again this week, as Wall Street looks past Thursday’s geopolitical turmoil in hopes of additional pro-growth gains. Super Thursday came and went with more than a few surprises. Former FBI Director James Comey’s testimony raised serious issues about President Trump, Congress passed a bill to strip key provisions from Dodd-Frank legislation and the U.K. election left no clear majority in control.
With Wall Street still digesting the torrent of news, futures on the Dow Jones Industrial Average have risen 0.14%, S&P 500 futures are up 0.13% and Nasdaq-100 futures have limped to a gain of 0.06%.
On the options front, traders still found time amid yesterday’s deluge to send an above average 16.3 million calls and 13.1 million puts across the tape Thursday. On the CBOE, the single-session equity put/call volume ratio dipped to 0.55, driving the 10-day moving average to 0.60 — its lowest point since February.
Diving into Thursday’s options activity, Alibaba Group Holding Ltd (NYSE:BABA) drew a surge in call options after guiding to its largest revenue increase since its 2014 IPO. Meanwhile, Nvidia Corporation (NASDAQ:NVDA) options were bolstered by a significant price-target hike at Citigroup. Finally, Tesla Inc (NASDAQ:TSLA) has become the most shorted stock on the U.S. market.
Alibaba Group Holding Ltd (BABA)
Alibaba is finally coming into its own, and Wall Street is taking notice. The Chinese e-commerce giant said that it expected revenue to rise 45% to 49% in fiscal 2018, blowing past analyst estimates which averaged in the high 30% range.
What’s more, CEO Daniel Zhang said that the increased “stickiness” of Alibaba users and improving data technologies should drive sales to record highs and boost gross merchandise volume to roughly $1 trillion by 2020.
BABA stock surged more than 13% following the news, and options traders chased the rally. Volume on BABA options spiked to a near-term high of nearly 1.7 million contracts, with calls snapping up 73% of the day’s take. What’s more, the July put/call open interest ratio dove lower to 0.61 overnight as a result of the influx of call volume. That said, BABA should still see call traders trying to adjust to the stock’s new heights, as peak July call OI rests at the now in-the-money $130 strike, totaling nearly 29,000 contracts.
Tesla Inc (TSLA)
TSLA is another rising stock that continues to advance in the face of growing pessimism. According to a report from S3 Partners, Tesla shares are now the most shorted on the U.S. market, with $10.4 billion in short interest. Per ShortSqueeze.com, that puts TSLA’s short interest at 26.5% of the stock’s total float, or shares available for public trading. The question now is how long can these bears hold out if TSLA stock keeps advancing? Is there the potential for a sharp short-squeeze rally for TSLA?
Yesterday’s options activity suggests that these shorts are not hedging as much as you might assume given the dollar values at stake. Volume on TSLA hit 707,000 contracts, with calls only making up 51% of the day’s take. Remember, short sellers often buy long calls to hedge their short positions in the case of an unexpected rally. Looking out to July, however, we find very little evidence of hedging, with the put/call OI ratio rests at an even 1.00.
Nvidia Corporation (NVDA)
Just when you think NVDA stock has hit a period of consolidation, news breaks that send the shares higher once again. Yesterday, Citi analysts lifted their price target on NVDA stock to $180, the highest on the Street. The current average consensus price target rests at just $125.59 according to Thomson/First Call. Citi cited the usual when it comes to lifting its target on NVDA, with AI, server chips and the company’s initiatives with self-driving cars seen as drivers for additional revenue beyond its improving market leadership in the videogames market.
Naturally, the price-target hike drew heavy attention from NVDA options traders, who sent more than 783,000 contracts across the tape on Thursday. Additionally, calls made up an impressive 61% of the day’s take. However, as I have noted repeatedly before, profit taking appears to be the big play for short-term NVDA options traders.
Specifically, the June put/call OI ratio continues to march higher, rising to 1.52 this morning from Tuesday’s mark of 1.44 and a reading of 1.37 on May 31.In other words, despite the added call volume, near-term options traders appear to be closing out long positions instead of adding to them.
However, if NVDA continues to march higher, call traders will eventually capitulate to the uptrend, and we’ll see a reversal in this put/call ratio as a result.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.