U.S. stock futures are trading lower this morning giving back much of the ground gained by yesterday’s recovery attempt. The weak open is disappointing options trading investors who hoped yesterday’s turnaround was signaling a much-needed market rebound. Ahead of the opening, futures on the Dow Jones Industrial Average are down 0.46%, S&P 500 futures are lower by 0.47% and Nasdaq-100 futures have lost 0.42%.
In the options trading pits, activity levels retreated from the high readings that accompanied the market swoon. Specifically, about 19.7 million calls and 17.4 million puts changed hands on the session.
Monday’s calm following Friday’s stormy swoon was enough to drive the CBOE single-session equity put-call volume ratio back down to 0.66. This marks a sharp one-day drop and suggests cooler heads are now prevailing. The 10-day moving average climbed slightly to 0.62.
Persistent strength out of crude oil drove options traders into Exxon Mobil (NYSE:XOM). Meanwhile, Square (NYSE:SQ) shares plunged after a BTIG analyst mentioned investors may be overlooking the company’s exposure to credit risks. Finally, Petrobras (NYSE:PBR) benefited from the continuing stampede into Brazilian equities.
Let’s take a closer look:
Exxon Mobil (XOM)
News for Exxon Mobil was light on Monday, but that didn’t stop traders from swarming. The world’s largest oil company scored an outstanding bullish engulfing candle on heavy volume to boot. The timing of the turnabout was fortuitous. Exxon’s pullback was testing the 20-day moving average and in need of a little help to maintain its nascent uptrend.
With price trends deteriorating all of the Street, today’s setup in XOM stock is one of the best you’ll find.
On the options trading front, traders came after calls with a vengeance. Activity swelled to 213% of the average daily volume, with 87,359 total contracts traded. 64% of the trading came from call options alone.
The increased demand drove implied volatility higher on the day to 21% placing it at the 47th percentile of its one-year range. This is the highest the reading has been since peaking ahead of the earnings release in mid-July.
Square Inc (SQ)
Square stock has long been considered the belle of the ball. Its dominance makes yesterday’s plunge particularly painful because it’s so uncharacteristic. The culprit lies with credit risk concerns raised by BTIG analyst Mark Palmer. In its ongoing efforts for growth, Square recently began offering “Square Installments” which allows users to break large purchases into multiple small payments paid monthly over time. While the new feature should boost usage, Palmer is concerned it brings credit risks that investors may be “overlooking.”
SQ stock fell 8.5% on the day amid the highest trading volume seen all year.
As far as options trading activity goes, color me surprised by yesterday’s results. Given the magnitude of the stock’s downfall, I would have guessed that put volume would have outpaced calls. But it didn’t. Total trading ballooned to 208% of the average daily volume, with 193,958 total contracts traded. Calls won the popularity contest claiming 56% of the amount.
Implied volatility rocketed higher to close at 64%. It now stands at the 60th percentile of its one-year range making options premiums more expensive than at any time since late-April. Options sellers are now being rewarded handsomely.
Petrobras (PBR)
Brazilian equities have been on fire this month, and Petrobras is leading the way. The state-controlled oil company soared 10.6% on large volume after Jair Bolsonaro bested expectations in the first round of voting for Brazil’s presidential election. It’s clear Wall Street views Bolsonaro as the more bullish candidate for stock prices.
Analysts from JPMorgan and Bank of America upgraded their ratings on PBR following Bolsonaro’s performance.
On the options trading front, calls were all the rage. By day’s end activity grew to 233% the average daily volume, with 421,867 total contracts traded. Call options dominated with 71% of the take.
With the outcome of Brazil’s presidential election now less murky, implied volatility is receding. Yesterday, it fell to 68% and rested at the 73rd percentile of its one-year range. A few days ago it was at the 100th percentile.
As of this writing, Tyler Craig held bullish XOM options positions. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.
