Tuesday’s Vital Data: Nvidia, Bank of America and Alibaba

Stock Market

U.S. stock futures are edging higher after Monday’s robust run. Small-cap stocks awoke in a big way, blasting through a year-long resistance zone. The Russell 2000 has finally departed its trading range and is poised to participate in a year-end run. Its emergence is yet another development favoring a bullish bias.

Source: Shutterstock

Heading into the open, futures on the Dow Jones Industrial Average are up 0.08% and S&P 500 futures are higher by 0.02%. Nasdaq Composite futures have added 0.03%.

In the options pits, the recent trend of call volume leading the charge persisted. We didn’t see any significant spikes, though. Specifically, about 19.6 million calls and 14.6 million puts changed hands on the session.

As for the CBOE Volatility Index (VIX), the gap between puts and calls narrowed slightly, with the single-session equity put/call volume ratio climbing to 0.63. The recent uptick in the reading was enough to pull the 10-day moving average back up to 0.57 finally.

Options traders swarmed a diversified list of stocks. Nvidia (NASDAQ:NVDA) saw renewed options interest after scoring an upgrade from Morgan Stanley. Bank of America (NYSE:BAC) pushed to an 11-year high amid continued bullishness in bank stocks. Finally, Alibaba (NYSE:BABA) completed a cup-and-handle formation with a rousing breakout.

Let’s take a closer look.

Nvidia (NVDA)

Source: The thinkorswim® platform from TD Ameritrade

Source: The thinkorswim® platform from TD Ameritrade

Nvidia shares surged almost 5% on 12.7 million shares after Morgan Stanley upgraded the chip stock to “overweight” from “equal weight,” and boosted its price target to $259 from $217. Even after Monday’s boon, $259 marks a 17% additional gain.

The NVDA stock chart has been extremely bullish for months. Yesterday’s beautiful breakout is simply the latest in a long line of bullish patterns that have resolve to the upside. Its year-to-date gain has now climbed to 66% and all major moving averages are rising.

On the options trading front, calls were driving the bus throughout the session. Total activity swelled to 156% of the average daily volume, with 202,348 contracts traded. Calls accounted for 62% of the day’s take.

Implied volatility tumbled to 34% and sits at the 4th percentile of its one-year range. We’re in an environment where selling options yields little reward and buying options is cheap.

The Trade: Bull call spreads are my strategy of choice here, though you might wait to see if a pullback or a pause arises to give you a better entry.

Bank of America (BAC)

Source: The thinkorswim® platform from TD Ameritrade

Source: The thinkorswim® platform from TD Ameritrade

Bank stocks tried to climb out of their multi-week base yesterday. Most succeeded in eclipsing resistance including Bank of America. Financial stocks have taken full advantage of the favorable backdrop for a bull run this quarter and their charts look bullish across the board. BAC stock boasts a rising 20-day, 50-day and 200-day moving average.

It’s perched at an 11-year high and not only broke out of a two-week base but a two-year one too. The resistance breach was enough to drum up options interest and land the banking giant on the top ten most-active options list.

Curiously, it was puts that dominated the session, accounting for 66% of the sum. Activity inched higher to 110% of the average daily volume, with 205,065 total contracts traded.

Implied volatility continues to hover at lowly levels. At 22%, the reading rests on the 6th percentile of its one-year range and shares the same message as Nvidia’s implied volatility. Namely, the pay for option selling strategies (like naked puts) is paltry and buying options is cheap.

My weapon of choice when the stock is cheap, volatility is low and I’m mildly bullish is a bull call diagonal. It’s also known as a poor boy’s covered call.

The Trade: Buy the Jan $32 call and sell the Dec $24 call for $1.60 or less.

Alibaba (BABA)

Source: The thinkorswim® platform from TD Ameritrade

Source: The thinkorswim® platform from TD Ameritrade

After months of congestion and false starts, Alibaba shares are finally exhibiting trending behavior. Yesterday’s 2% jump saw some 19.2 million shares change hands and solidified the uptrend by completing a cup-and-handle formation.

Chart watchers are understandably excited at the upside resolution and looking for more upside. The old peak at $195.72 is the first logical target. Above that and $205 comes into play. A push back below $182 support would invalidate the breakout and warrant reassessment. Until then, however, it’s game on for bullish plays.

As far as Monday’s options action, traders favored calls by a wide margin. Activity grew to 109% of the average daily volume, with 217,038 total contracts changing hands. 66% of the trading came from call options alone.

Implied volatility held steady at 29% or the 17th percentile of its one-year range. Premiums are baking in daily moves of $3.49 or 1.8%. At almost $200, BABA stock is expensive, so vertical spreads are easier to use than long calls. The low implied volatility favors buying options over selling.

The Trade: Buy the Feb $190/$200 bull call spread for around $4.40.

As of this writing, Tyler Craig held bullish positions in NVDA. For a free trial to the best trading community on the planet and Tyler’s current home, click here

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