U.S. stock futures are in full retreat this morning, as Wall Street is shaken by escalating tension between the U.S. and North Korea. Yesterday, North Korea threatened missile strikes against the U.S. territory of Guam after President Donald Trump promised “fire and fury like the world has never seen” if North Korea doesn’t stop threatening the U.S. The ratcheted up saber-rattling between the two nations has created considerable uncertainty for traders.
At last check, futures on the Dow Jones Industrial Average had retreated 0.17%, Nasdaq-100 futures had lost 0.62% and S&P 500 futures were down 0.34%.
On the options front, volume ramped up on Tuesday, with about 16.8 million calls and 15.3 million puts changing hands. Meanwhile, the CBOE single-session equity put/call volume ratio slipped to 0.68, while the 10-day moving average held in four-month high territory at 0.68.
Turning to Tuesday’s options activity, Bank of America Corp (NYSE:BAC) saw increased call option speculation in the wake of a Goldman Sachs note predicting more dividend hikes for the banking sector. Meanwhile, SeaWorld Entertainment Inc (NYSE:SEAS) was flooded with puts after a weak quarterly report and evaporating attendance. Finally, BP plc (ADR) (NYSE:BP) was popular with call traders after the company announced a major natural gas discovery in Nevada.
Bank of America Corp. (BAC)
Banks are undervalued, Goldman Sachs said in a weekly address this weekend. The brokerage firm believes that banking stocks like BAC will benefit beyond 2017 from momentum for deregulation and movements to return tens of billions of dollars to investors. If the recent trend continues, Goldman noted, “our banks analyst Richard Ramsden estimates that total capital payouts could grow at an average annual pace of 19% through 2020.” What’s more, Goldman said that stock repurchases at large banks like BAC will surge 45%.
BAC traders were in need of some good news, as the shares have languished below resistance for weeks. However, the boost wasn’t enough to push the shares north of $25, which has held BAC in check since March.
Options traders, however, chimed in with confidence. Volume on Tuesday rose to nearly 807,000 contracts, with calls snapping up 65% of the day’s take. However, not many are targeting a breakout before August options expire at the end of next week, as the August put/call open interest ratio currently rests at a mediocre reading of 0.73, indicating a lack of short-term bullish confidence in BAC stock.
SeaWorld Entertainment Inc (SEAS)
SEAS stock was hit with a massive influx of put volume on Tuesday, after SeaWorld said that attendance in the first half of 2017 plunged by 353,000 compared to last year. What’s more, SeaWorld also said it lost $2.05 per share in the second quarter, missing the Street’s estimate for a profit of 32 cents per share by leagues. As a result, SEAS stock plunged more than 6% on Tuesday, and is now trading just shy of its September lows.
SEAS options traders piled on following the report. Volume topped 399,000 contracts to hit a record near-term high. What’s more, puts made up roughly 93% of yesterday’s activity. Data from Trade-Alert.com indicates that a considerable number of these puts were tied up in a pair of calendar spreads.
Specifically, two blocks of over 40,000 contracts traded at the March 2018 $17 put (sold at the bid of $4.56) and the January 2018 $17 put (bought at the ask of $4.45). A similar trade comprised of blocks totaling more than 27,000 contracts also traded at the March 2018 $17 put and the December $17 put.
BP plc (ADR) (BP)
BP stock traders have had something to cheer about lately. The company announced that it has discovered a potentially significant natural gas well in Colorado, just south of the Colorado border in the San Juan basin. In the well’s first 30 days of operation, BP said it produced an average of 12.9 million cubic feet per day. “We are delighted with the initial production rate of this well,” said Dave Lawler, who is the CEO of BP’s U.S. Lower 48 onshore business, in a statement.
Options traders responded by flooding BP stock with calls. Volume on Tuesday rose to 287,000 contracts, with calls ballooning to 96% of the day’s take. Much of this activity took place in longer-term options contracts, however, as the August put/call OI ratio remains elevated at 1.54 — with puts easily outnumbering calls among front-month options.
It seems options traders are willing to wait out the current rock-bottom prices in natural gas in a bet that BP can leverage the well for future growth.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.