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Week of December 12, 2022

Once again, the sellers stepped in last week and at least in the short term dented the bulls’ optimism. By week’s end the S&P 500 had fallen 3.35%, the Dow had lost 2.71%, and the Nasdaq had declined by 3.57%.

December 15, 2022
Position Update – SBUX/BX/PINS

Staying on brand for 2022, where every rally is a selling opportunity, today the market is getting hit hard, as the S&P 500 is lower by 2.9%, while the Nasdaq is leading the declines, with a loss of 3.7%. UGLY yet again!

Because of this market weakness, and to play a bit of defense, I am going to add a mental stop to our Starbucks (SBUX) position that is working well, but certainly could come under pressure should the indexes really fall apart. With the stock trading at 100, I am going to set that mental stop at 95. What this means is in the next month, should SBUX hit that 95 level, I will send a trade alert with instructions to exit our bullish position.

Moving on …

While the market decline is less than ideal, I would note that our recently purchased Blackstone (BX) puts are working well as the stock is making a new low today at 77. And into this stock decline, options traders continue to buy puts on the stock, including these trades yesterday and today:

Today - Buyer of 3,000 Blackstone (BX) January 78 Puts (exp. 1/6/2023) for $3.40 – Stock at 79.5

Yesterday - Buyer of 3,500 Blackstone (BX) February 75 Puts for $4.25 – Stock at 81.30.

I’ve flirted with adding to our BX put position, but for now am going to “hang out” with our half position.

And finally, Pinterest (PINS) soared earlier this week, but is down today with the market. However, stepping back I think the stock continues to look promising, and I’m very intrigued by this HUGE call buy today in the stock:

Buyer of 45,000 Pinterest (PINS) March 25 Calls for $3.45 – Stock at 25.3 (rolled from December calls).

I think our PINS position will work if the market can get in gear … though given the selling pressure today, that is again in question.

December 12, 2022
CPI and Federal Reserve Preview

This week has the potential to be a doozy as traders will be laser-focused on the Consumer Price Index (CPI) Tuesday morning, and the Federal Reserve announcement on Wednesday afternoon. Let’s dive into what the options market is pricing in for these two events …

In recent years the options world has introduced more and more option expiration dates, including DAILY options for the S&P 500 (SPY) and Nasdaq (QQQ). Using those daily options, we can look at what the market is pricing in for both potentially market-moving events this week.

Tuesday – December 13
The options market is pricing in a move of 2.27% between today, and the close of trade on Tuesday, for the S&P 500.

Wednesday – December 14
The options market is pricing in a move of 3% between today, and the close of trade on Wednesday, for the S&P 500. What makes this expected move greater than the Tuesday move is that one extra day of time, as well as both events, are priced in.

Finally, as traders do the mental gymnastics the next three days as to whether inflation has been priced in, whether future rate hikes priced in, and what it means for the stock market to close the year, and into 2023, this tongue-in-cheek comic from @AndreaSteno on Twitter may have perfectly summed up what could be an explosive week.

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December 12, 2022
Weekly Update

Once again, the sellers stepped in last week and at least in the short term dented the bulls’ optimism. By week’s end the S&P 500 had fallen 3.35%, the Dow had lost 2.71%, and the Nasdaq had declined by 3.57%.

This week could be explosive for the market as traders anxiously await one of the last major inflation data points of the year, and the Federal Reserve’s announcement on interest rates.

Stocks on Watch

Option activity was relatively quiet last week, with little that piqued my interest outside of a special situation noted at the bottom of “Stocks on Watch”. Because there were so few meaningful options trades, I wanted to update my list of buy candidates due to stock strength. That list includes:

SFM
HOG
CAT
GILD.

The list of stocks above is not “sexy,” but is a great illustration that it’s been a Dow/Consumer Staples/Safety market rather than a Nasdaq/Growth market the last couple of months.

In terms of the special situation noted above, on Friday of last week a trader bought a position in leading marijuana player Canopy Growth (CGC) ahead of what most traders expect will be a positive, or negative, development coming out of Washington for the sector this week. Here is that trade:

Friday - Buyer of 12,000 Canopy Growth (CGC) December 3.5 Calls for $0.13 – Stock at 3.

The trade above is not exactly something I have interest in getting involved with. However, I would note that this type of call buying was seen throughout the sector, and option volatility is sky high in all of the stocks/ETFs (CGC/TLRY/MJ/MSOS) ahead of this potential announcement this week.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 23, or higher by 20%. I would expect the VIX to stay at this level or even trade higher in the days to come ahead of the “big” CPI report on Tuesday and Federal Reserve announcement on Wednesday.

However, once those two potentially market-moving events have passed, and if the market doesn’t implode, the VIX will likely be under pressure again headed into the holiday season.

Option Order Flow was fairly mixed this past week as my Options Barometer came in at:

Monday – 4
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 5

Events for the Week to Come

This week has the potential to be a doozy, as the CPI report (inflation) on Tuesday and the Federal Reserve announcement on Wednesday (very likely a 50-bps hike) could set in motion a Santa Claus rally, or yet another bear market decline that has been a staple in 2022. Buckle up!

On the earnings front, it will mostly be a quiet week, with ORCL on Monday, and ADBE on Thursday being the headliners.

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What Traders are Saying

Having added a half position in Blackstone (BX) puts to the portfolio last Monday, and still holding in-the-money S&P 500 (SPY) puts as well as a handful of bullish positions, we are in an interesting situation where we want the market to go up but are also OK if it falls.

So, what are the best- and worst-case scenarios for a “hedged” portfolio?

Best case, the market goes higher, and our bullish positions race higher while BX continues to fall based on its much-discussed BREIT redemptions issue. However, in that scenario our SPY puts would fail, which is “OK” as we always knew that this put buy was a hedge.

Conversely, it’s also possible the market falls apart, our bullish positions suffer losses, while our SPY and BX positions likely explode in value.

Essentially, when stepping back, I think we are mostly hedged against a big downside or upside move this week, and in the months to come.

Open Positions

Long positions: BAC, XBI, GOOG, LVS, PYPL, SBUX, CCJ, PINS, VALE
Bearish Positions: SPY, BX

Bank of America (BAC) December 37 Covered Call – BAC had an awful week as the stock fell 10%. I have not yet found a specific catalyst for this decline, which leads me to believe that the “recession trade” could be the main cause.

Blackstone (BX) March 80 Puts – On Monday of last week we added the BX March 80 Puts to the portfolio for $7.87. For now, and it’s early, this trade is working well as the stock continues to slide, and option activity has been wildly bearish.

Biotech ETF (XBI) January 84 Call – Right on cue, just as I was again excited by XBI breaking out above the 84/85 range, the stock fell apart last week. My patience is running out quickly on this position.

Alphabet (GOOGL) February 120 Calls – GOOGL fell 7% last week as tech was again under pressure. Not much more to add.

Cameco (CCJ) December 26 Covered Call – CCJ continues to be range bound, which is fine for our short volatility covered call. At this point I expect the December 26 call that we sold for $0.69 will expire worthless on Friday (good).

Las Vegas Sands (LVS) March 44/60 Bull Call Spread – LVS was mostly unchanged last week, which was fairly impressive given the stock run. Our position is in good shape, and option activity remains strong. Of note, we turned this position into the 44/60 bull call spread via a sale of the 60 call for $1.13 on Monday.

PayPal (PYPL) March 80 Call – PYPL was mostly unchanged last week, though of note option activity was bullish on to close the week, including a buyer of 3,000 February 75 Calls for $6 – Stock at 73.

Pinterest (PINS) March 25 Call – PINS, like XBI above, again fell just as the stock was shaping up. Such is 2022 trading action. Of note, the company entered into a long-term cooperation agreement with Elliott Investment Management including the appointment of an Elliott representative to the Board of Directors effective Dec 16, 2022. It is expected that Elliott could push Pinterest to make changes beneficial to the company and its shareholders.

S&P 500 ETF (SPY) March 420/320 Bear Put Spread – For now, I will continue to hold our hedge, just in case the market once again falls apart.

Starbucks (SBUX) January 85/110 Bull Call Spread – SBUX fell 3% last week, though it still looks like one of the strongest stocks in the market. Our position is in outstanding shape.

Vale (VALE) June 17 Calls – As noted in an update, on Friday VALE was upgraded by Morgan Stanley and given a price target of 20. The stock looks terrific, and option activity remains strong.

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.