U.S. stock futures are trading higher again this morning, continuing this relief rally. In premarket action, the futures on the Dow Jones Industrial Average are up 0.46% and S&P 500 are higher by 0.39%. Nasdaq-100 have added 0.52% to yesterday’s gains.
In the options pits, call buyers were busier than bears yesterday. Markets meandered higher while waiting for some geo-economic news. We still need President Donald Trump to actually sign the agreement to avert a U.S. government shutdown. This rally could disappear quickly if news on that front disappoints. Meanwhile, Wall Street still has one foot out the door. Investors will sell first and ask questions later. Regardless, the action was bullish since we had 18.9 million calls and 15.2 million puts during the session.
Markets seem on edge, even when in the green. This is the byproduct of being in headline trading mode while we await news from the tariff talks between the U.S. and China. Nevertheless, the CBOE single-session equity put/call volume ratio remain stable 0.57 versus the the 10-day moving average of 0.62. Sentiment remains positive in spite of the caution.
Options activity was bullish on Wednesday. This is normal as fear levels abate. Twitter (NYSE:TWTR) was in the news and spiked 4% and the action was also bullish in the options. Freeport-McMoRan (NYSE:FCX) had an even bigger rally, up almost 7% yesterday. The appetite for options was voracious, suggesting more potential to come. Finally, Eli Lilly (NYSE:LLY) wasn’t as exciting on the Wednesday scoreboard, but its options action made up for it.
Let’s take a closer look:
Eli Lilly (LLY)
Eli Lilly stock might be ready to make a big move. This week the options have been active and the calls have overwhelmed the puts. Yesterday LLY options traded 727 times its daily average volume. While the split favors the bears slightly, it’s even enough to leave the bias neutral.
Usually when options get to be this active, it means that there is an imminent move in the stock. This much action in it above the normal levels is unusual. Such a tense situation will resolve itself soon, but unfortunately we don’t know the direction of the breakout.
So we rely on the charts and the levels to tell us when to go long or short. Eli Lilly stock is at all time highs so clearly it’s having a great year. Shorter term, it is stuck between $120.30 and $118.10 per share. A breach of either side of this range will carry momentum in that direction. The secondary targets from those edges are $121.40 versus $117.05. Those, too, are potential catalyst levels. It is best to trade the triggers rather than anticipate the moves.
Twitter reported earnings recently, and the stock collapsed more than 10% on the headline. This was a shame, since TWTR stock was in the middle of a breakout from $34 per share. Luckily for bulls, on Wednesday it spiked sharply on the 13-F news that Morgan Stanley (NYSE:MS) has a new 5.6% stake in the stock. Investors chased the stock up but closed off the highs.
So it is no surprise to see Twitter stock options trade 138 times their daily average. Moreover, 70% of the Wednesday options were calls to only 30% puts. It is clear that traders now expect a rebound from the earnings rout.
Before chasing, it is important that it maintains the short-term higher-lows trend. So losing $30.30 would cause a deflation in the immediate rally. Conversely, a breach above $31.82 would trigger a buy signal to fill the earnings gap and target $34 per share. It would be a tall order to expect much more of it here.
Freeport McMoRan (FCX)
FCX reported earnings in January and the stock fell more than 15% on its heels. Since then, it completely recovered from it. But there might be even more good news and the options markets know it.
On Wednesday, FCX options traded 204 times their daily average. More to the point, the mix was 76% calls to only 24% puts and this suggests a very bullish bias. The technicals point to much more upside off the breach of $12.10 per share.
If the bulls can continue past $12.30 it could continue on its way to $13 or higher. There are resistance areas in between but this breakout has momentum. The concern from here that this stock moves fast but in both directions. And this fast recovery from earnings left a big gap below that beacons.
Tight stops are a must when trading FCX stock. Those who are in it for an investment should trade it according to their fundamental opinions of it. I recently wrote a bullish article about the upside potential in FCX.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.