Thursday’s Vital Data: Square, Netflix and Fortive

U.S. stock futures are trading higher this morning. Wall Street continues to digest Federal Reserve Chairman Jerome Powell’s comments from yesterday. The Fed hiked its key lending rate to 2.25%, as expected, but Powell’s bullish comments on the U.S. economy are resonating.

Specifically, the central bank indicated that it would raise rates again in December, and three more times in 2019. The Fed also lifted it’s gross domestic product growth forecasts for 2018 and 2019, and dropped references to “accommodative” policy.

Against this backdrop, futures on the Dow Jones Industrial Average are up 0.06% and S&P 500 futures are higher by 0.11%. Nasdaq-100 futures have added 0.31%.

In the options pits, call volume spiked sharply yesterday, helping to drive overall volume back to average levels. Specifically, about 19.1 million calls and 14.6 million puts changed hands on the session.

However, those calls didn’t translate over to the CBOE, where the single-session equity put/call volume ratio rose to 0.59 — a two-week high. The 10-day moving average held its ground at in one-month low territory at 0.57.

Options activity was a mixed bag on Wednesday. Square (NYSE:SQ) saw renewed options interest after a price target hike. Netflix (NASDAQ:NFLX) benefited from an industry subscriptions report. Finally, Fortive Corporation (NYSE:FTV) was flooded with activity amid its unit sale to Altra Industrial Motion (NASDAQ:AIMC).

Let’s take a closer look:

Thursday’s Vital Options Data: Square, Netflix and Fortive

Square (SQ)

Following on the heels of calls to add Square to FAANG (FAANGS anyone?), SQ received another bullish analyst note. Buckingham Research raised its price target on SQ to $105 from $85 yesterday.  

According to the research firm, “With a broadening suite of higher-margin software/services that Square can leverage across its scaled (and still growing) small- and medium-sized business merchant base, we firmly believe Square’s recent top line acceleration is sustainable.”

SQ stock dipped just shy of 1% yesterday, but the pullback came after Tuesday’s more than 11% rally. Options traders weren’t slowed in the least. Volume on SQ jumped to 173,000 contracts, or nearly double the stock’s daily average.

Calls claimed 70% of that volume, and appeared to be new positions. Specifically, SQ’s October put/call open interest ratio fell sharply from 1.33 yesterday to 1.24 today. In other words, calls were added at a much faster pace than puts on Wednesday.

Netflix (NFLX)

NFLX stock rallied about 2.3% yesterday as investors caught wind of a new industry report on streaming service subscriptions. Digital TV Research issued a report projecting that global streaming service subscriptions would rise by 409 million between 2017 and 2023.

The research firm also projected that Netflix would own a quarter of that 777 million market with 192 million subscriptions — 82 million more than current levels.

The report breathed life back into NFLX stock options traders. Volume rose to 249,000 contracts, or about 1.2 times the stock’s daily average. Calls were popular at 68% of the day’s take.

There has been a continued shift toward NFLX calls in the options pits recently. In the past two months, Netflix’s October put/call OI ratio has fallen from 1.1 to 0.73. NFLX stock is up modestly during this period, but yesterday’s breakout above $370 could be a sign that the rally has finally taken hold.

Fortive Corporation (FTV)

For the better part of the past two weeks, Fortive options have wound their way into the top 10 most active options listing. News has been scarce on the company, but the driver for this unusual activity is more than likely Altra’s $3 billion acquisition of four of Fortive’s automation and specialty businesses.

While FTV has seen incredibly unusual options activity for weeks, yesterday was the last day to officially get in on the merger deal for shareholders. This led to a considerable spike in FTV options volume, with more than 635,000 contracts changing hands — or about 5.5 times FTV’s daily average. Calls and puts were split down the middle.

The acquisition is being structured as a Reverse Morris Trust and is tax free to shareholders. Meanwhile, the driver for this excessive call activity is likely options arbitrage related. In this case, traders sell out-of-the-money calls to gain control of the shares just long enough to profit from the merger deal.

As of this writing, Joseph Hargett held no positions on any of the aforementioned securities.

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