U.S. stock futures are trending slightly lower in early morning trading. With the S&P 500 up 12% in just over two weeks, it may be time for prices to pause.
Heading into the open, futures on the Dow Jones Industrial Average are down 0.32% and S&P 500 futures are lower by 0.49%. Nasdaq-100 futures have shed 0.63%.
In the options pits, call trading ruled the day as usual, even as overall volume levels increased from the lull that has settled on the market in recent days. Specifically, about 20.3 million calls and 18.3 million puts changed hands on the session.
Over to the CBOE, the single-session equity put/call volume ratio fell to 0.59 as it continues to ping-pong back and forth in the middle of its range. Meanwhile, the 10-day moving average fell once more to 0.62.
Options traders zeroed in on analyst actions yesterday. Canopy Growth Corporation (NYSE:CGC) options were hot after Piper Jaffrey started covering the marijuana company with a robust price target. Micron (NASDAQ:MU) benefited from an analyst upgrade. Finally, Ford (NYSE:F) stock rallied on news of large jobs cut in the automaker’s European operations.
Let’s take a closer look:
Canopy Growth Corp
Yesterday, Tilray (NASDAQ:TLRY) was in the spotlight. Today, it’s Canopy Growth. CGC stock jumped 13.4% after Piper Jaffrey initiated coverage for the Canadian-based marijuana company with a one-year price target of $40. The size of the potential market and marijuana legalization were cited as reasons for the firm’s rosy outlook.
With the price surge, CGC stock is now back above the 50-day and 200-day moving averages. It’s the first time Canopy has been above the 50-day since its nasty descent began last October. Consider this a strong start to what could become a new uptrend for the beaten-down stock.
On the options trading front, call demand surged as traders took to the derivatives market to express their enthusiasm. Activity swelled to 433% of the average daily volume, with 92,202 total contracts traded. 80% of the trading came from call options.
The buying binge drove implied volatility higher on the day to 72%, placing it at the 31st percentile of its one-year range. Nonetheless, implied volatility still rests near a four-month low which makes options much cheaper than they were at the height of Canopy’s price ascent last September.
The silver lining of dramatic price declines is the cheaper valuations that often follow. We’ve seen just such a phenomenon play out with Micron over the past six months, and analysts are starting to take note. Just yesterday, Mark Newman, a Bernstein analyst, cited the now attractive risk/reward for beaten-down MU stock as part of the reason for upgrading the stock from market perform to outperform.
Here’s the money quote, “For Micron, although we still see up to 20% potential further downside in the worst scenario (back to 0.85x book as seen in the 2015/16 downturn), the risk/reward is now too attractive to ignore.”
With MU running headlong into overhead resistance after the upgrade, however, I suggest caution in the short run. Previous rallies have been cut short at the 50-day moving average, so wait and see if the current one suffers the same fate before piling in.
On the options trading front, calls weren’t as dominant as you might expect. They only slightly outpaced puts on the day 51% to 49%. Total activity did rise to 173% of the average daily volume, with 286,845 total contracts traded though.
Implied volatility inched higher on the day to 54%, placing it at the 54th percentile of its one-year range. Premiums are pricing in daily moves of $1.21 or 3.4%.
Shares of Ford surged 4.2% on cost-cutting measures announced for its Europe operations. The move is the latest development in the ailing automaker’s recently announced $11 billion restructuring to better compete in a changing marketplace.
Bloomberg succinctly summed up the news. “Ford Motor Co. said it will cut thousands of jobs, weed out slow-selling variants and potentially close entire factories in Europe, as the carmakers’s global cost-cutting drive targets a region that has been a drag on earnings for years.”
Despite the price jump, the technicals of F stock remain bearish with its downtrend still very much intact. Time will tell if its upcoming earnings release (Jan. 23) can lend a hand to the trend reversal efforts.
On the options trading front, calls outpaced puts on the session. Total activity grew to 181% of the average daily volume, with 159,650 total contracts traded. Calls accounted for 55% of the day’s take.
Implied volatility ticked slightly higher on the day to 46%, placing it at the 66th percentile of its one-year range. Premiums are now pricing in daily moves of 25 cents or 2.9%.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.