U.S. stock futures are trading lower this morning after sellers swarmed to reject yesterday’s rally attempt. With resistance now reaffirmed, bears are in control of the short-term trend. Ahead of the bell, futures on the Dow Jones Industrial Average are down 0.7%, and S&P 500 futures are lower by 0.6%. Nasdaq-100 futures have lost just under 0.6%.
Yesterday’s action in the options pits was extremely quiet, with volumes falling across the board. By day’s end, only about 13.7 million calls and 13.4 million puts changed hands on the session.
With calm returning to the markets, the CBOE single-session equity put/call volume ratio dropped back to 0.65, which is a two-week low. Meanwhile, the 10-day moving average remained stalled at 0.71.
Options activity was a mixed bag on Wednesday (Options traders zeroed in on analyst actions yesterday). Nvidia (NASDAQ:NVDA) saw high options interest after RBC Capital raised its price target 14%. Alibaba (NYSE:BABA) saw its rally rejected at resistance and is falling close to 2% in pre-market trading. Finally, Uber (NYSE:UBER) continues to point to lower prices and is offering an attractive setup for bears.
Let’s take a closer look.
Nvidia (NVDA)
Source: ThinkorSwim
Nvidia rallied for its third straight day after RBC Capital lifted the company’s price target to $190 from $217. The bullish shift points to 18% more upside in the stock based on Monday’s close.
That said, yesterday’s close should give bulls pause in the short run. The intra-day gains melted by day’s end, creating a nasty topping tail on the candle. Couple that with this morning’s weak opening for the broader market and caution is warranted. We’ve now had two failed attempts to break above $188, so consider that the level that needs to be breached before the next leg of NVDA stock’s advance can begin.
On the options trading front, calls outpaced puts by a modest margin. Total activity grew slightly to 124% of the average daily volume, with 133,554 contracts traded. Calls accounted for 56% of the day’s take.
The uptick in implied volatility was minimal, but the reading did push up to 46% — landing it at the 23rd percentile of its one-year range. Premiums remain cheap and are baking in daily moves of $5.28 or 2.9%. Bull call spreads on a breakout over $188 make sense.
Alibaba (BABA)
Source: ThinkorSwim
Alibaba took it on the chin last week after rumors emerged that the White House was considering restricting investments into Chinese stocks. Buyers finally returned once BABA stock pushed into deeply oversold territory, but if Monday’s rejection is any indication, the rebound is over and more pain awaits.
The technical posture for BABA remains precarious. Yesterday’s reversal occurred at a logical spot. Old support at $171 turned into new resistance. The selling pressure is picking up in pre-market trading with shares set to open down slightly over 2%. A move toward the next floor at $152 could be in the cards.
Curiously, calls dominated the day, despite the sharp rejection. Activity climbed to 118% of the average daily volume, with 182,541 total contracts traded. 68% of the trading came from call options alone.
The increased demand drove implied volatility higher on the day to 36% placing it at the 30th percentile of its one-year range. Premiums are pricing in daily moves of $3.81 or 2.3%. Bear puts are attractive here.
Uber (UBER)
Source: ThinkorSwim
Uber fell to an all-time low of $28.31 last week and remains locked in a nasty looking downtrend. The three-day bounce that has since formed is highly suspect. If anything, it makes UBER stock more attractive to short because you now have a lower-risk entry, a higher vantage point to deploy bearish trades from.
Options trading was fairly subdued, but UBER still landed atop the leaderboard with total activity climbing to 116% of the average daily volume. By day’s end, 52,946 contracts traded, 53% of which were call options.
Implied volatility has climbed from 42% to 56% over the past three weeks and sits at the upper end of its range. The higher premiums suggest spreads are a smart choice versus buying options outright. This will mitigate the high cost and improve your probability of profit. If you think the pain keeps coming, then bear puts are a good choice.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
