Position Update: White Wave Foods (WWAV)
We initially executed a bullish trade in WWAV after traders began building long-term bullish positions. I mentioned in my initial trade alert that there has long been speculation that WWAV is a takeover target of Coca Cola (KO), Pepsi (PEP) and other food and beverage companies.
The option order flow has been extremely bullish in WWAV since the middle of last week, and accelerated today. Here is the list of trades since last Wednesday:
Wednesday
Buyer of 5,000 WWAV October 47.5 Calls and Seller of October 37.5 Puts (bull risk reversal)
Seller of 5,000 WWAV January 35 Puts for $1.30 (trader willing to buy 500,000 shares at 35)
Thursday
Seller of 2,500 WWAV January 35 Puts for $1.15
Friday
Buyer of 2,000 WWAV July 47.5 Calls for $0.75
Today
Buyer of 1,500 White Wave Foods (WWAV) August 52.5 Calls for $0.50
Buyer of 2,500 White Wave Foods (WWAV) October 50 Calls and Sold October 40 Puts (bull risk reversal)
Buyer of 3,000 White Wave Foods (WWAV) July 50 Calls for $0.50
The 5,000 bull risk reversal from last Wednesday was the most bullish outright trade. However, the buy of 3,000 July 50 Calls today is also very intriguing with the stock trading just below 47, and earnings not expected until August. The only known catalyst for a big upside move would be a presentation at a Jefferies Global Consumer Conference tomorrow morning. However, I doubt that would be the trigger for a big move higher.
Because of all of this call buying, skew, which is the options market perception of downside/upside risk, is acting odd as the stock again trades near recent highs.
June 20, 2016
Weekly Update
The three major indexes were all under selling pressure last week as the S&P posted its worst week since April, and the Nasdaq closed the week at its lows. For the week, the S&P 500 lost 1.19%, the Dow fell by 1.06% and the Nasdaq dropped by 2.25%.
For the bulls, it was a challenging week. The market was again questioning the future rate of interest rate hikes and the fear of Brexit paralyzed traders. However, even with these uncertainties, the S&P 500 is still within a couple percent of all-time highs. Also, Retail Sales and Housing Starts beat expectations this week, and Janet Yellen again said that the Federal Reserve is likely to hike rates at a gradual pace. Following her comments, traders are pricing in just one interest rate hike in 2016.
For the bears, it was a nearly perfect week as selling pressure from the end of the prior week continued. Also, the financials in the U.S. and Europe remain under selling pressure, and biotech stocks have fallen for nine straight days, its longest streak in two decades, losing 10%. As the Dow and the S&P 500 closed marginally lower at the end of the week, many growth leaders fell apart, pushing the Nasdaq lower by 1.4% on Friday.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 19.41, higher by 14% on the week. I would expect the VIX to remain at 18 or above headed into the Brexit vote on June 23. As I said last week, this binary event could easily be compared to a FDA ruling on an experimental drug or an earnings announcement for a particular stock. But in this case, this event may have a dramatic effect on the entire market.
Events for the Week to Come
This upcoming week’s economic calendar is fairly light; the largest potential event in the U.S. is a speech by Janet Yellen on Tuesday. Though, at this point, it’s become pretty clear that interest rate hikes are not expected anytime soon--the market now only sees a 7% chance of rate hike in July. Between interest rates and the upcoming Brexit vote, the market may go quiet in the days leading up to the June 23 vote.
What Traders are Saying
As I’ve noted several times in the last couple of weeks, this upcoming Brexit vote has the potential to be a real nuisance for traders and investors. Without question, there is the potential for some market volatility following the vote. However, will stocks such as Veeva Systems (VEEV), a California-based cloud-based software company, or White Wave Foods (WWAV), a Colorado-based organic foods company, really be affected in the long run by the U.K.'s decision to stay or leave the European Union?
So as the vote nears, how might a trader position himself for this binary event? (Note the market is gapping higher this morning, so I’m suggesting strikes that are near where the market is indicated in pre-market trade.)
If bullish on the S&P 500, the SPY July 210 Calls (exp. 6/24) for $2
If bearish on the S&P 500, the SPY July 208 Puts (exp. 6/24) for $2.20
If you are looking for bullish/bearish exposure from European stocks, the financials are likely the sector to target. Deutsche Bank (DB), Credit Suisse (CS) and Barclays (BCS) are top candidates.
However, I am not the only trader that has figured this out, so volatility/price of options is extremely high. If you are buying calls or puts with volatility at elevated levels, you are theoretically overpaying--unless the market or the stocks make a significant move.
Open Positions
Boston Scientific (BSX) November 23 Calls - BSX, which had held up well all week, finally gave up some ground on Friday. That said, our position is in fine shape.
Cypress Semiconductor (CY) Buy-Write
- We no longer have a stock or option position in CY. That said, a trader bought a huge bull call spread in CY on Friday, and we might get back into a position.
Facebook (FB) July 120 Calls - Call buying never stops in FB, yet the stock continues to chop around, which is not a great situation. We may have to adjust this position if FB can’t begin to move higher again.
Kinder Morgan (KMI) January 37.5 Calls - It will take a miracle/big move higher for this position to come back to life.
Pfizer (PFE) January 32 Calls (exp. 2017)
- Like BSX, PFE had looked great until it fell on Friday. Also like BSX, our PFE position is still in good shape.
Power Shares QQQ ETF (QQQ) September 108 Puts
- Fortunately or unfortunately, our puts are working perfectly as the QQQ closed the week at its lows.
Veeva Systems (VEEV) September 36 Calls - VEEV fell with the Nasdaq stocks on Friday, though it still looks fine compared to most of its peers.
White Wave Foods (WWAV) October 42.5 Calls
- Options trading in WWAV was extremely bullish all week and the stock closed the week at its highs.
United States Oil ETF (USO) Buy-Write - The USO closed the week at the ideal spot for this buy-write.