U.S. stock futures are trading lower as investors prepare for the next Federal Reserve rate decision. The market is currently pricing in a 64% probability of a quarter-point rate cut during tomorrow’s meeting. The current target rate is 2% to 2.25%.
Ahead of the bell, futures on the Dow Jones Industrial Average are down 0.27%, and S&P 500 futures are lower by 0.20%. Nasdaq-100 futures have shed 0.16%.
Trading in the options pits has been remarkably consistent of late with call volume leading the way every single day. Once again, traders favored calls pushing total volume north of 21.5 million. Put volume, meanwhile, climbed to 16.2 million matching recent average levels.
The distance between calls and puts narrowed at the CBOE, however, with the single-session equity put/call volume ratio jumping to a two-week high at 0.68. The rise wasn’t enough to halt the ongoing decline in the 10-day moving average, though. It fell to another two-month low at 0.61.
Options traders swarmed energy stocks Monday. Halliburton (NYSE:HAL) and Exxon Mobil (NYSE:XOM) were two of the largest players among the top four. American Airlines (NYSE:AAL) fell 7.3% on its highest volume session since January.
Let’s take a closer look:
Surging oil prices set the tone Monday. And energy stocks were the biggest beneficiary. Traders pushed aggressively into Halliburton shares throughout the session, creating its highest volume session in four years, with over 36.5 million shares traded.
The one-day 11% rally provided a much-needed boost to HAL stock, powering it above its 50-day moving average and a key descending trendline. While much work remains before its intermediate- and long-term trends turn higher, the rapid turnabout is beckoning to bottoming fishers.
The energy sector is one of the only areas that has wholly sat out the latest stage of the bull market. Traders can use the 200-day moving average near $26 as HAL stock’s next target.
On the options trading front, traders came after calls with a vengeance. Activity ballooned to 530% of the average daily volume, with 125,386 total contracts traded; 82% of the trading came from call options alone.
The increased demand drove implied volatility higher on the day to 49% placing it at the 75th percentile of its one-year range. With premiums now juiced, short options strategies are the way to go. I like naked puts into weakness if you believe HAL could be bottoming.
Exxon Mobil (XOM)
As the king of the oil field, Exxon Mobil was an obvious target for traders chasing energy stocks. However, it’s behavior was far less bullish or exciting than that seen in the smaller names. While many companies saw their shares gap and run (a breakaway gap), XOM stock was sold aggressively right at the open and gave back about half of its gains.
It finished the day only up 2.3%. Perhaps the trouble lied with the location of its gap. XOM jumped directly into the 200-day moving average, which has had a history of rejecting its prior rally attempts. The stock had already run ahead of the gap, so maybe this was a case of running too far too fast. Whatever the reason, XOM stock will need some backing and filling before mustering the strength to take out the 200-day.
The options trading mirrored Halliburton’s with calls dominating the day. Total activity zoomed to 413% of the average daily volume, with 125,482 contracts traded. Calls added 84% to the session’s sum.
Implied volatility rallied on the day but remains low at 22% or the 25th percentile of its one-year range. Premiums are pricing in daily moves of $1.01 or 1.4%.
American Airlines (AAL)
The perception that higher oil prices are a headwind for airlines was on full display. While energy stocks soared, airlines soured. American Airlines dropped 7.3% amid massive distribution giving back all of last week’s gains in a single session.
AAL stock was making strides, pushing above its 50-day moving average and turning its short-term trend higher. Unfortunately, Monday unwound it all, pushing the chart back into bearish territory. Until $30 can be reclaimed, bulls should probably shop elsewhere.
On the options trading front, calls outpaced puts despite the thrashing. Activity climbed to 241% of the average daily volume, with 95,155 total contracts traded. Calls accounted for 61% of the day’s tally.
Implied volatility rose to 41% or the 31st percentile of its one-year range. Premiums are now pricing in daily moves of 71 cents or 2.6%.
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.