U.S. stock futures are trading lower this morning amid renewed trade war fears. This time, President Donald Trump has refocused his attention on the European Union.
Yesterday, Trump threatened “tremendous retribution” against the EU if next week’s meeting fails to bring a fair trade deal on autos.
Against this backdrop, futures on the Dow Jones Industrial Average are down 0.32%. Meanwhile, S&P 500 futures have fallen 0.31% and Nasdaq-100 futures have dropped 0.4%.
In options activity, call volume dominated yesterday’s trading, pushing overall volume back to normal levels. In fact, about 18.1 million calls changed hands yesterday, compared to just 12.6 million puts. Activity on the CBOE was similar, as the single-session equity put/call volume retreated to 0.56 — a one-week low. Even the 10-day moving average turned lower, slipping to 0.61.
Options traders keyed into Netflix (NASDAQ:NFLX) yesterday following a cord-cutting report that did not bode well for cable providers. Elsewhere, Ford (NYSE:F) puts were active after the company announced a 550,000 vehicle recall. Finally, JD.com (NASDAQ:JD) saw some rather bearish early speculation ahead of next month’s earnings report.
Let’s take a closer look:
Netflix (NFLX)
Cord cutting will cost the cable-TV business billions this year, as a projected 5 million subscribers ditch traditional pay TV. New York consulting firm cg42 said that 5.4 million U.S. consumers will cut the cord in 2018, representing $5.5 billion in lost revenue. Last year, cable TV lost 4.8 million subs, which was up from a loss of 3.8 million in 2016.
“As the process of finding alternative paths to content gets easier and easier, people are acting on the frustrations they have with traditional providers and leaving,” cg42 told Marketwatch.
As the No. 1 option for cord-cutter content, Netflix stands to benefit greatly from this continued trend. In fact, NFLX stock is up 5.4% from its post-earnings lows as traders bet that last quarter was just a blip.
NFLX options traders have been a bit slower to come around. Volume yesterday rose to 374,000 contracts, with calls only managing 54% of the day’s take.
This trepidation is also evident in NFLX’s August put/call OI ratio, which currently rests at 0.94. With puts just shy of parity with calls in the back-month August series, NFLX stock is going to have trouble making headway for the time being.
Ford (F)
Ford Motor is in trouble once again this year. Fresh off settling the Takata Corp. air-bag recall for roughly $300 million, Ford announced another recall yesterday. Ford is now recalling 550,000 Fusion and Escape models. According to Ford, there is a problem with faulty bushings in the transmission that could cause cables to detach and indicate that a vehicle is in “Park” when it is not. This poses a risk of the vehicle rolling away.
F stock didn’t seem to perturbed by the news yesterday, but F options traders were certainly a bit shaken. Volume came in at 178,000 contracts, with calls and puts split nearly down the middle.
The most interesting thing to come out of Ford’s options activity yesterday was what appears to be a July/August calendar spread. One trader bought 35,000 July $12 puts and sold 35,0000 July $12 calls . At the same time, the trader sold 35,000 August $12 puts and bought 35,000 August $12 calls.
The idea behind the calendar spread is to profit from the passage of time and/or an increase in implied volatility. With Ford reporting earnings next week, a rise in volatility heading into the report is almost certain.
JD.com (JD)
The trade war rhetoric between the U.S. and China has not been kind to JD.com, even though the ecommerce retailer should see little impact from these trade issues. Fear has taken over Wall Street when it comes to Chinese stocks. This fear has also spilled over into JD’s options pits ahead of next month’s earnings report.
Specifically, volume yesterday rose to 146,000 contracts, with calls only managing to claim 57% of the day’s take. About 22,800 of those call contract were directed at a bearish options strategy.
According to Trade-Alert.com, JD was hit with a bearish reversal spread, otherwise known as a synthetic short. In this strategy, the options trader sells an out-of-the-money call and buys an out-of-the-money put. By doing so, the trader simulates the return of a short stock position, without having to borrow the shares. The risk/reward is also similar to a short stock position: limited on the downside and theoretically unlimited on the upside.
JD.com’s synthetic short took place at the August $38 strike, where a trader bought 22,800 August $38 puts and sold 22,800 August $38 calls.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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