Today's Options Market Update

Elevators can't go straight up forever, as Friday's early Wall Street declines indicated after four consecutive record-setting days. The early selling could reflect buyers' exhaustion, though political developments in Europe that rattled markets there might also play a role.

"Stocks have been in 'melt-up' mode," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "However, with Q2 earnings season a month away, a lack of near-term catalysts to push stocks higher, a fully priced market multiple, and technically overbought status in tech leadership, risk/reward is skewed to the downside from a near-term trading basis, so some mean reversion over the next week or so wouldn’t surprise me."

Flag Day kicks off with the S&P 500^® index (SPX) up 1.6% so far this week and on pace for its seventh weekly gain in the past eight. It's up 9% from the April closing low and almost 14% year to date. 
Factors driving recent bullish momentum include Nvidia's (NVDA) 10-to-1 stock split, a split by semiconductor giant Broadcom (AVGO), falling Treasury yields thanks to improved inflation metrics, and a positive response to Apple's (AAPL) developer's conference. Gains are skewed mainly to the tech sector, though mega caps are mostly lower this morning.

Treasury yields fell and the dollar climbed early Friday in what Briefing.com noted might reflect a "flight to safety" amid European political uncertainty.

Major catalysts look sparse now that inflation data, several large tech earnings reports, and central bank meetings are over. It's also still a month until earnings season. Trading was light yesterday and may remain so ahead of the weekend as the market consolidates another leg of the rally.

The 10-year U.S. Treasury yield (TNX) is dropping three basis points to just over 4.20%.

The U.S. Dollar Index ($DXY) continues its rise to a one-month high of 105.72 amid European political uncertainty and after the Bank of Japan (BoJ) kept rates unchanged.

The Cboe Volatility Index^® (VIX) is jumping to 12.44.

WTI Crude Oil (/CL) is climbing 0.4% to $78.91 per barrel.

Bitcoin (BTC) is up 0.6% to $67,084.

Source: Schwab Center for Financial Research

Shares of Adobe Inc. (ADBE + $66.52 to $525.08) are jumping today, up over 14%, their biggest gain since 2020, after the software company reported better-than-expected Q2 revenue and earnings that topped expectations. Adobe's Q2 sales increased 10% year-over-year to $5.31 billion while EPS, excluding some items, was $4.48 a share. Analysts had projected earnings of $4.40 a share on revenue of $5.29 billion. Of particular strength, Bloomberg noted, was the company's document cloud business. That unit added $165 million of new annually recurring revenue in Q2, compared with the $122.7 million expected by analysts. This was driven by users opting for a new AI-assistant feature, which helps analyze and understand PDFs and other documents, according to the company’s CEO.

Adobe upped its revenue outlook for the full fiscal year to $21.40 billion to $21.50 billion, along with $18.00 to $18.20 in adjusted EPS. Analysts were expecting $21.47 billion and $18.00, respectively.

Adobe also boosted its forecasts for Digital Media net new annual recurring revenue and Digital Experience subscription revenue. Digital Media net new annual recurring revenue is now expected to be about $1.95 billion, while Digital Experience subscription revenue is anticipated to come in at $4.77 billion to $4.82 billion.
Analysts are taking note with several of them raising their PTs on the shares following the report, including JP Morgan (to $580 from $570) and Wells Fargo (to $700 from $675).

Trading in options of ADBE rose to over 146,719 contracts in morning trading (10x daily average) with calls slightly outpacing puts. Leading the way are the following trades, expirations, and strikes:

• June 14th, 2024, 500.00 put accounted for 4,630 contracts; open interest is 150 contracts.
• June 14th, 2024, 550.00 call accounted for 4,552 contracts; open interest is 1,301 contracts.
• June 14th, 2024, 530.00 call accounted for 3,474 contracts; open interest is 868 contracts.

New 52-week highs (27 new highs today): Mereo Biopharma Group (MREO + $0.19 to $4.18), Nvidia Corp. (NVDA + $1.81 to $131.45), Avidity Biosciences Inc. (RNA + $0.12 to $40.08), Netflix Inc. (NFLX + $20.11 to $673.38), Coherent Corp. (COHR + $0.75 to $71.67)

Unusual call activity is noted today in Trip.com Group (TCOM - $0.30 to $50.39), as option traders have pushed call volume to 3,989 contracts in morning trading (20x daily average). The January 17th, 2025 expiration is the most active month, as 1,900 call vertical spreads have been purchased through multiple blocks. The strikes involved in the transaction were the 70.00 and 85.00 strikes, with traders purchasing the spread for a $1.00 debit when the bid/ask was $0.05 x $1.75. Spreads, as you can see, were quite wide given the lack of liquidity in the January 17th, 2025 expiration month. We know these bull call spreads represent new positions, as the collective open interest between the strikes is 305 contracts, and the strategy is bullish in nature.

Other call activity of note can be seen in Citizens Financial Group (CFG - $0.44 to $34.04), as call activity has spiked to 10,184 contracts in morning trading (11x daily average). Most of that volume can be attributed to activity in the August 16th, 2024 expiration month. Traders have purchased the 35.00 / 37.50 call vertical over 5,000 times today through multiple block transaction in what appears to be a "roll down" of a long call position from the 37.50 strike to the 35.00 strike. These transactions have cost, on average, around $0.97, and effectively are debits meant to own the calls on the lower strike. This could be in reaction to recent prices moves that have pulled back CFG shares from a high of $37.30 in May to their current level of $34.04. Perhaps traders believe a bounce is in order and want to own closer to-the-money calls to participate.

Shares of RH (RH - $49.47 to $227.53) are down over 17%, their biggest slide since 2020, after the furniture retailer reported a larger-than-expected EPS loss for Q1. RH reported a Q1 loss of $0.40 EPS which missed the analyst consensus estimate of losses of $0.12 by a large margin. Quarterly sales came in at $726.96 million which beat the analyst consensus estimate of $724.7 million and is a 1.65% decrease from sales of $739.16 million from the same period last year. The company announced that demand was up 3% in the quarter, slightly below its initial guidance, which RH attributed to softening growth as interest rates exceeded 7% and weakness in the housing market prevailed.

Going forward, RH forecasts Q2 demand growth in the range of 9% to 10% and revenue growth of between 3% and 4%. The company said it expects demand growth in the range of 12% to 14% and revenue growth of between 8% and 10% on a year-over-year basis. But of course, much of that depends on housing demand and turnover which, at this point, has been hampered by high mortgage rates and dwindling supply.

Multiple analysts cut price targets on RH shares, including Bank of America (to $325 from $375), Wells Fargo (to $350 from $360), and TD Cowen (to $325 from $350).

Option trading in RH currently stands at 39,356 contracts, 7x the daily average. Leading the way are the following trades, expirations, and strikes:

• June 14th, 2024 220.00 put accounted for 1,408 contracts; open interest is 523 contracts.
• June 14th, 2024 225.00 put accounted for 1,174 contracts; open interest is 315 contracts.
• June 14th, 2024 215.00 put accounted for 1,124 contracts; open interest is 515 contracts.

New 52-week lows (112 new lows today): Microcloud Hologram Inc. (HOLO - $0.08 to $1.33), Kenvue Inc. (KVUE - $0.08 to $17.95), Unity Software Inc. (U - $0.45 to $16.34), Schlumberger (SLB - $0.96 to $42.85)

Some unusual put activity is noted today in Dexcom Inc. (DXCM + $1.65 to $115.46). This activity equates to over 11,930 put contracts, 10x average daily put volume, and is being driven by multiple put diagonal trades, as traders are rolling out and down long positions in the June 21st, 2024 expiration to the August 16th, 2024, expiation. The strikes employed in this trade are the 115.00 strike in June and the 105.00 strike in August, and the roll trade has occurred over 5,500 time intraday for a debit price of $0.81.  Basically, traders are willing to pay the debit to maintain their long-put positions even at a lower strike (signaling bearish intent). Interestingly, today's rally in share price took the stock back to its 200-day simple moving average. It’s likely traders believe this test of the moving average will fail and are rolling the contracts to stay with their bearish thesis.

Unusual put activity can also be seen in Grupo Financiero (GGAL - $0.41 to $34.79), as put volume stands at 5,531 contracts in morning trading, 7x average daily volume. Much of this volume stems from a large put purchase that occurred in the July 19th, 2024 expiration month. Traders have bought over 5,500 contracts of the 28.00 strike put for a price of $0.60 when the bid/ask was $0.05 x $0.65. This represents new positioning given the open interest of 109 contracts (suggesting bearish intent). Shares of GGAL are not that far from 52-week highs, after more than doubling year-to-date. Perhaps this is a hedge or a bet that a pullback may be in order.

The Cboe Volatility Index (VIX + 0.55 to 12.49) has been up all morning within a fairly wide range (the intraday range is 12.12 – 13.45) as equity markets are down across the board at the midday mark (DJI - 71, SPX - 8, COMPX - 5). VIX option volume is above average today as it sits at the 9th spot on the "Top Volume by Underlying" list. The volume put/call ratio is currently 0.31 with the highest volume contract being the June 18th, 2024, 13.00 call (volume is 30,526 vs. open interest of 85,084).