Trump trade comeback staged in the options market

Investors began the week writing an obituary for the Trump trade, but yesterday options traders placed bets that rumors of such a death may be greatly exaggerated.

The apparent shift in sentiment came amid a flurry of positive business news events. First, consumer confidence unexpectedly and dramatically surged to a 16-year high.1 There were also positive housing and manufacturing numbers.2

The market reacted by returning to the same sectors that rallied after Trump’s surprise electoral victory in November, especially banks, transports, and industrial metals. A large option bet in aluminum producer Alcoa (NYSE: AA) followed that trend, with an investor buying 10,000 May 34 calls for $1.83 and selling 10,000 May 36 calls for $1.10.

Calls fix the price where a security can be purchased, so they can appreciate in value when a stock rallies. Selling them creates an obligation to deliver shares if a certain level is reached.

Tuesday’s trade was known as a spread because it combined both strategies. The resulting position cost $0.73 and will inflate to $2 if AA closes at $36 or higher on expiration – a potential profit of 174 percent. Should it not climb sufficiently or drop, the entire premium will be lost. AA rose 1.39 percent to $32.92 at yesterday’s close.

Industrial-metal stocks like AA are closely associated with Trump, who’s promised to boost infrastructure spending and reduce competition from foreign countries. 

Alcoa vs. Newmont Mining, 5-month chart

Source: OptionsHouse by E*TRADE

Option activity was bearish in gold stocks, which have moved in the opposite direction because they generally perform better in a weak economy. Yesterday, for instance, blocks of Newmont Mining (NYSE: NEM)’s 7-April 35 puts were amassed for $2.08 to $2.25. Over 11,000 contracts changed hands by the time the dust settled.

Puts are the opposite of calls, making money to the downside because they fix the price where shares can be sold. They can lose all their value if a rally occurs. NEM slid 2.68 percent to $33 yesterday.

It’s probably not a coincidence that their contracts expire the same day the Labor Department issues its key jobs report for March. After all, a strong number could potentially lift interest rates and economic optimism. That, in turn, would threaten gold miners like NEM. 

In summary, sentiment recently shifted away from domestic-growth stocks that have been darlings of the new administration. But some good economic reports are drawing money back. 

1. Marketwatch: Consumer confidence soars in March to best reading in 16 years. 3/28/17.

2. US home prices rise 5.9 percent to 31-month high in Jan: S&P CoreLogic Case-Shiller. 3/28/17; Richmond Fed rises to best since 2010. 3/28/17