U.S. stock futures are headed for record territory in the last day of trading before Christmas. Wall Street is continuing to cheer the passage of the Republican tax plan, which only needs President Donald Trump’s signature to become law. Already, AT&T Inc. (NYSE:T) and Wells Fargo & Co (NYSE:WFC) have pledged to raise wages and pay out bonuses if the legislation is signed this year.
Meanwhile, traders will be flooded with data before leaving to spend time with their families. Economic reports today include durable goods orders, core capital orders, personal income, and consumer spending and core inflation for November, as well as November new-home sales and the December consumer sentiment reading.
Heading into the open, futures on the Dow Jones Industrial Average are down 0.01%, S&P 500 futures have added 0.02% and Nasdaq-100 futures have lost 0.02%.
Options volume was below average on Thursday, as many traders appear to have already left for home. Overall, about 15.6 million calls and 11.7 million puts changed hands on the session. The CBOE single-session equity put/call volume ratio heald at 0.56 and the 10-day moving average ticked lower to 0.56, yet another 52-week low.
Drilling down on Thursday’s options activity, Time Warner Inc (NYSE:TWX) attracted several large call blocks yesterday, with one spread betting heavily on a successful buyout from AT&T. Meanwhile, options traders are signaling that Wells Fargo may be an underdog banking stock following the passage of the Republican tax plan, and Vale S.A. (ADR) (NYSE:VALE) trades ex-dividend today.
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Time Warner Inc. (TWX)
Since the deal was announced last year, TWX stock has bounced around well below AT&T’s proposed purchase price of $107.50 per share. Uncertainty is the main reason for TWX not rallying to within reach of AT&T’s offer, with Justice Department scrutiny and the current lawsuit remaining a cloud over the deal.
However, optimism that the deal will go through has risen in recent weeks, and TWX options traders are beginning to bet on a positive outcome. TWX volume yesterday rose to over 193,000 contracts, or more than four times the stock’s daily average. Calls gobbled up 73% of the day’s take.
One trader took that optimism to another level, however. According to Trade-Alert.com, blocks totaling 30,000 contracts and marked “spread” traded on each of TWX’s July $82.50 put, $95 call and $105 call. The $95 calls purchased, while both the other contracts were sold. The total outlay for this spread was $1.34, or $134 per trio of contracts.
Assuming these contracts crossed as marked, and were a spread, the trader could pocket $866 per contract if TWX trades at or above $105 when July options expire — a strike that is just below AT&T’s purchase price.
Wells Fargo & Company (WFC)
WFC stock was left behind in the banking sector’s tax-plan driven run higher this year. The shares have added a mere 15% compared to the Financial Select Sector SPDR ETF’s (NYSE:XLF) gain of roughly 30%. But WFC stock traders are beginning to finally come around as the tax plan heads toward implementation. In fact, analysts at Buckingham upgraded WFC to “buy” from “neutral” on the news, lifting WFC’s price target to $75 from $57.
Options traders were also in a bullish mood yesterday. Volume on WFC rose to 145,000 contracts, with calls making up 81% of the day’s take. There is still some acceptance to be had among speculative traders, as the January 2018 put/call open interest ratio rests at an elevated reading of 0.81 for WFC. That reading should drop sharply in the coming weeks, however, as more traders realize the potential upside for WFC stock following the tax plan’s passage.
Vale S.A. (VALE)
It’s ex-dividend day for Vale. The Brazilian mining company is set to pay out a quarterly dividend of 9.8 cents per share on March 22, 2018. Shareholders of record by the close last night are eligible for the dividend payout.
As a result, VALE stock was flooded with call activity yesterday, as options traders sought to capture the quarterly payout. Volume topped 163,000 contracts, and calls accounted for 93% of the overall activity. Options traders typically buy in-the-money calls as a way to gain control of a stock ahead of its ex-dividend date, resulting in heavy dividend-capture activity the day prior.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.