Weekly Update
April 8, 2024
For the past six to nine months the consensus among traders had been that the Federal Reserve would be cutting interest rates this year, and some thought it would be aggressive cutting. However, that narrative may have changed on Thursday as two Fed members noted that the central bank might not cut at all in 2024. This sent shockwaves through the stock market Thursday and Friday.
By week’s end the S&P 500 had fallen1%, the Dow had lost 2.25% and the Nasdaq had declined by 1%.
Stocks on Watch
There is no question the leaders in terms of option order flow the last two weeks have been gold/silver/copper plays. However, right behind those metals’ trades have been call buyers in oil/natural gas stocks, including these buys from Tuesday and throughout the week:
Tuesday: Buyer of 4,000 Exxon Mobil (XOM) September 140 Calls for $1.18 – Stock at 118.5
Buyer of 7,000 NOV (NOV) July 22 Calls for $0.75 – Stock at 19.65
Buyer of 2,000 Antero Resources (AR) June 30 Calls for $1.79 – Stock at 29.3.
The call buys noted above are a small sample of this oil-related call buying, and I’m certainly intrigued. The only thing that may hold me back from adding an oil play is we already have exposure to commodities via our FCX and GDX trades. That being said, should this activity continue in oil leaders such as XOM, OXY (steady call buying as well) and others, we may get involved.
And finally, even though we sold our position in Nutanix (NTNX) a couple weeks ago, and despite some bumps along the way, the stock is again nearing its highs and on Thursday a trader executed the following trade:
Buyer of 1,500 Nutanix (NTNX) June 65 Calls for $6 – Stock at 65.
I’m “flirting” with the idea of hopping back into a NTNX position, especially if options activity continues to ramp up.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16. Of note, on Thursday after the market sold off into the close, the VIX closed that day above 16, which was its highest close this year.
And furthermore, despite the market bouncing back nicely on Friday the VIX remained above 16. This is somewhat of a yellow flag for me, though it’s just one signal and, somewhat conversely, option order flow on Friday was fairly bullish, as noted below.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 6
Events for the Week to Come
Now that the inflation debate is back at center stage the macroeconomic events of this week will get plenty of attention. Here are those potential market-moving highlights:
Wednesday – CPI (inflation data)
Wednesday – Fed Meeting Minutes (inside look at the last Federal Reserve Meeting)
Thursday – PPI (inflation data)
Friday – Consumer Sentiment
And on top of that all, we will get another eight Federal Reserve speeches this week.
What Traders are Saying
I received three good questions from Cabot Options Trader/Cabot Options Trader Pro subscribers last week that I wanted to share with the larger group. Here they are, along with my responses …
COT/COTP Subscriber: How would you recommend using the Daily Option Order Flow Watchlist to make trades on my own?
Jacob: I think the best way is to stick to my general rules. If you are looking to buy calls based on the trades you see on the Watchlist, which are made by hedge funds and institutions, then you should target:
Calls that are at-the-money
Calls that have 6-9 months until expiration.
If you stick to that playbook, and like the set-up in a stock on my daily watch list, in a strong market, it is your best trade for success.
COT/COTP Subscriber: In terms of covered calls, any reason we shouldn’t just sell puts to get exposure to stocks instead of buying the stock and selling the call?
Jacob: Depending on how your broker handles your account, when you consider the margin that is needed to sell the puts, it’s basically the same amount of capital at risk.
That being said, I have ZERO issue with you selling puts instead. That is a totally fine strategy and the risk and reward are the exact same as executing a covered call.
COT/COTP Member: I bought the NVO September 135 calls a few weeks ago. When will these start losing money from time decay? I want to give the stock a chance to come back up but would like to understand around when we should think about getting out from a time standpoint. Is there an easy way to track this?
Jacob: As for the decay, at this point it’s very minimal. In fact, the true value of the decay is around one penny a day.
However, as we get closer to June/July that decay will accelerate, and then in August and September these options will lose value very fast if the stock isn’t much higher.
I’m trying to give this NVO trade more time, though I’m definitely wary of the lack of progress, and if things don’t turn around soon, we may take a partial loss.
Open Positions
Freeport-McMoRan (FCX) November 46 Calls – FCX has been on a big run which is great for our recently purchased calls. Also, option activity remains very strong, including this trade from Tuesday:
Tuesday: Buyer of 40,000 Freeport-McMoRan (FCX) June 55 Calls for $1.18 – Stock at 48.
Gold Miners ETF (GDX) January 33 Calls – GDX calls are the newest addition to the portfolio following a week of wild call buying in Gold and Silver, as well as gold and silver stocks. This trade is off to a pretty good start as the GDX gained 3.25% on Friday.
Robinhood (HOOD) January 15 Call – HOOD finally came under some pressure last week following a meteoric rise. That being said, I think the stock looks great.
Also of note, option activity remained bullish all week, including this trade from Tuesday:
Tuesday: Buyer of 10,000 Robinhood (HOOD) April 20 Calls for $0.70 – Stock at 19.15.
Novo Nordisk (NVO) September 135 Calls – NVO has not been great, though I think still looks fine. And fellow Cabot analyst Mike Cintolo thinks similarly, as I asked him what he thought about the chart. Here are his thoughts:
Mike: “In terms of the chart, I like the pullback, and the 50-day is here at 123-124. That said, the stock hasn’t been able to stop going down – though at 130-131 it gets interesting.”
Palantir (PLTR) April 19 Call – PLTR has been bleeding lower for the past couple of weeks, though does look “OK”. That being said, time is definitely an issue for our trade as our calls will expire in two weeks.
Depending on option activity and market action we may hold these calls as is, sell entirely, or perhaps sell our calls and buy new calls with more time until their expiration. Only time will tell …
Permian Resources (PR) April 15 Covered Call – PR is now trading $3 above our strike price, which is great for our covered call that should expire for its full profit in two weeks.
Equal Weight ETF (RSP) June 158 Calls – The RSP fell some last week along with the market, though much like the market the pullback seems totally normal (for now). Our calls are in great shape.
Snap (SNAP) August 17 Calls – SNAP continues to chop around aimlessly, which is frustrating. Though as has been the case for weeks, call buyers continue to add to upside call positions.
Taiwan Semiconductor (TSM) September 130 Calls – TSM has had its ups and downs, like most Semiconductor/AI plays, but importantly the stock has held its ground even when the market has come under pressure. Of note, on Friday a trader bought this call, looking for higher prices in the months to come.
Friday – Buyer of 1,000 Taiwan Semiconductor (TSM) June 145 Calls for $8.85 – Stock at 140.
Nasdaq ETF (QQQ) November 430 Puts – A nasty day like Thursday when the Nasdaq fell quickly from its highs is exactly why we are holding our QQQ puts against a bullish portfolio. This is essentially an insurance policy that we hope never pays off.
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