Geopolitical concerns were thrust to the forefront last night, sending U.S. stock futures skidding after the U.S. killed Iran’s top military bad guy, Qasem Soleimani.
Crude oil spiked 3.5%, the CBOE Volatility Index (VIX) jumped 17% and risk assets fell. Futures on the Dow Jones Industrial Average are down 0.84% and S&P 500 futures are lower by 0.92%. Nasdaq Composite futures have lost 1.09%.
In the options pits on Thursday, traders chased calls all session long, reflecting the bullish undertones. Approximately 25.1 million calls and 15.8 million puts changed hands.
Meanwhile, at the CBOE, the single-session equity put/call volume ratio fell back to 0.54. At the same time, the 10-day moving average held its ground at 0.53.
Let’s take a closer look.
Chinese stocks were one of the biggest winners Thursday, no doubt buoyed by continued optimism over the recent trade deal. Alibaba (NYSE:BABA) and Baidu both scored gains of 3.6% and 9.4%.
BIDU stock now sits in a fantastic technical position. It just completed a seven-month rounded bottom pattern and now sits back above its 200-day, 50-day and 20-day moving average. Last May’s earnings drop created a large gap area that is just now starting to fill and provides room for BIDU to run until $152.
On the options trading front, calls were the hot ticket on the session. Total activity swelled to 398% of the average daily volume, with 170,400 contracts crossing the tables. 72% of the trading came from call options alone.
The increased demand drove implied volatility up to 38%, placing it at the 38th percentile of its one-year range. Premiums are baking in daily moves of $3.28 or 2.4%. With the bottom likely in for BIDU, selling bull put spreads into this morning’s weakness is attractive.
The Trade: Sell the Feb $120/$115 bull put for around 70 cents.
Advanced Micro Devices (AMD)
Just when you thought Advanced Micro Devices couldn’t get any hotter, it rips another 7.1%. Monday’s buying binge pushed AMD stock even deeper into overbought territory and is the latest evidence that momentum traders are in complete control.
Their enthusiasm spilled into options trading with calls outpacing puts by a wide margin. Activity jumped to 279% of the average daily volume, with 809,129 total contracts traded. Calls drove 70% of the session’s sum.
Implied volatility rallied to 52% or the 31st percentile of its one-year range. The expanded premiums are now pricing in daily moves of $1.60, so adjust your expectations accordingly.
This morning’s weakness will likely prove a buying opportunity. Selling puts offers a high probability path to play.
The Trade: Sell the Feb $40 puts for around 85 cents.
General Electric (GE)
Industrial stocks received some love Thursday, with General Electric leading the way. The struggling giant of years gone by recaptured some of its magic with an enormous 7% rip that carried it to a new 52-week high. It appears investors are optimistic about the company’s prospects and turnaround chances in the new year.
With its year-long trading range now left behind, GE stock sits in a prime position for continued recovery. The next upside target is $15.
On the options trading front, traders came after calls with conviction. Activity ballooned to 256% of the average daily volume, with 243,384 total contracts traded. Calls accounted for 78% of the day’s take.
Implied volatility rose slightly to 36% but remains near the lower end of its range at the 9th percentile. With premiums still cheap, long calls are a smart trade if you think the new uptrend has legs.
The Trade: Buy the March $10 calls for around $2.
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!