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Week of February 27, 2023

Following another week of hotter-than-expected inflation data and hawkish Fed speak, the leading indexes had their worst week of 2023. The S&P 500 fell 2.75%, the Dow lost 3%, and the Nasdaq declined by another 3.3%.

March 3, 2023
Stock on Watch – Meta (META)

As a parent of a teenage daughter and son, I think the former Facebook (FB), which is now reclassified as Meta (META), is a poison on our kids’ brains. My daughter looks at Instagram too much, and my son plays VR (virtual reality) constantly (when he isn’t playing sports).

And while I personally think META is “evil, ”trading isn’t about picking stocks/options that fit my personal beliefs. Which brings me to META the stock …

META soared higher in February following a positive earnings report. Since then, the stock has mostly chopped around, which is impressive, as the market has weakened in the last three weeks.

Today META is trading higher by 5.5%, and option activity is ramping up in a big way, including these short-term call buys:

20,000 March 180 Calls (exp. 3/10)

10,000 March 182.5 Calls (exp. 3/10)

15,000 March 185 Calls (exp. 3/10)

And while those short-term call buys are interesting, I would note that option activity has been bullish in the stock for the past two weeks as well.

While I think AAPL/MSFT/AMZN/GOOGL look bleh, I’m becoming more and more intrigued by fellow mega-caps META, NVDA and CRM, all of which responded very well to earnings.

February 27, 2023
Weekly Update

Following another week of hotter-than-expected inflation data and hawkish Fed speak, the leading indexes had their worst week of 2023. The S&P 500 fell 2.75%, the Dow lost 3%, and the Nasdaq declined by another 3.3%.

Stocks on Watch

In this week’s Stocks on Watch, I am going to combine this section with the Volatility section. The reason I am doing this today is the stock market, which is down approximately 5% in the last two weeks, and the options market have been sending mixed messages. For example …

Even though the market has been falling, the Chicago Board of Options Exchange Volatility Index (VIX) has been rising, but is hardly screaming panic. In fact, the VIX closed Friday at 21.5, which is just a couple points above its recent low. This would lead me to believe that the sell-off is simply a run-of-the-mill decline.

Also, option activity has been mixed for weeks, including last week, where my barometer came in at a 5 (or split evenly) every day, as seen below:

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

And digging even deeper into this mixed option activity, even on days where the market is falling the put buying is hardly alarming. For example, here was the list of put buying on Friday as the market was making recent lows:

Buyer of 2,000 Pure Storage (PSTG) April 27 Puts for $1.60 – Stock at 28.25

Buyer of 3,000 Blackstone (BX) June 80/70 Bear Put Spread for $2 – Stock at 89

Buyer of 1,500 Nordstrom (JWN) July 17.5 Puts for $1.89 – Stock at 19.2.

Not exactly terrifying put buying in market leaders (for now).

And while the lack of put buying, and the muted VIX, are not showing signs of worry, I will say call buying activity has slowed down a great deal as well. For example, the leaders in terms of bullish option activity, as seen below on Thursday and Friday, were cheap call buys in airlines, as well as a $6 stock and a far out-of-the-money put sale:

Buyer of 8,000 American Airlines (AAL) March 16 Calls for $0.63 – Stock at 16

Buyer of 45,500 American Airlines (AAL) April 17 Calls for $0.64 – Stock at 16

Buyer of 3,000 United Airlines (UAL) June 55 Calls for $3.20 – Stock at 51

Buyer of 23,000 Transocean (RIG) May 7 Calls for $0.65 – Stock at 6.6

Buyer of 9,000 Transocean (RIG) May 8 Calls for $0.40 – Stock at 6.6

Seller of 2,000 Palo Alto Networks (PANW) January 150 Puts (exp. 2024) for $8.62 – Stock at 183 (trader willing to buy 200,000 shares at 150).

Stepping back, my thoughts on the market are much like they have been the past two weeks.

  1. The indexes have softened, though the pullback seems normal.
  2. Option activity has been super quiet throughout, which for the most part means the big options traders don’t have high conviction in the direction of the market.
  3. I have a ton of stocks on my watch list following recent earnings beats, and will put fresh capital to work in those stocks should the market re-strengthen, and if the VIX continues to not show worry.

Events for the Week to Come

This week will be full of economic data points of interest to traders, though there are no “headliners” such as CPI/PCE inflation data releases, which have moved the market in weeks past. Below is the full slate:

Monday - Durable Goods Orders, Pending Home Sales
Tuesday - Chicago PMI, Consumer Confidence
Wednesday - ISM Manufacturing, Construction Spending
Thursday - Initial Jobless Claims
Friday - ISM Services

On the earnings front, while the heart of earnings season has passed, there are still several high-profile companies set to report quarterly numbers this week, including salesforce (CRM), Snowflake (SNOW), Workday (WDAY), and FirstSolar (FSLR):


What Traders are Saying

On Thursday of last week we entered into the FTI April 14 covered call. The prices I was filled at were a buy of the stock at 14.06 and a sale of the April 14 call for $1.02; net, we paid $13.04 for the position.

On Friday FTI stock rallied 8%, closing the week at 15.22, which in my opinion is a great scenario, as the higher the stock goes, the more likely it is we will capture our full profit. However, there are other options traders who look at covered calls differently. This is what I mean.

Some would look at this scenario and say, should FTI continue to rally, we will make our 7.36% but we will be taken out of our position in April. These folks prefer for the stock to trade below the strike, and then continue to sell calls month after month.

Those traders prefer trades like our BAC covered call, where we continue to sell calls every month. For example, recently we locked in a profit of $0.37 on our February 36 call and then immediately sold the March 36 Call for $0.60. BAC closed Friday at 34.2, and it’s looking like, though no guarantee, the March call will expire worthless in the coming weeks.

Stepping back, I could see either outcome as a positive development, as making a 7.36% profit in two months’ time would be great, but so would racking up covered call “dividends.”

Finally, one last note: Because BAC is trading well below our short strike price, we will capture the $0.22 dividend in the coming weeks.

Open Positions
Long positions: BAC, DIS, FTI, LVS, VALE, IWM
Bearish Positions: SPY, BX

Bank of America (BAC) March 36 Covered Call – See “What Traders are Saying”, above.

Blackstone (BX) March 80 Puts – BX fell 5% last week, and put buying is once again picking up steam. Should the market truly unwind, it “feels” like BX could be a prime short target again.

Disney (DIS) September 105/130 Bull Call Spread – In the short term, and I mean since earnings were released, DIS looks awful. That being said, option activity picked up steam late last week, including this trade:

Thursday – Buyer of 10,000 Disney (DIS) May 110 Calls for $2.92 – Stock at 100 (rolled from April calls).

TechnipFMC (FTI) April 14 Covered Call – See “What Traders are Saying”, above.

Las Vegas Sands (LVS) March 44/60 Bull Call Spread – LVS pulled back marginally last week, but still looks terrific. Our trade remains in great shape.

Russell 2000 (IWM) August 185 Call – Much like the S&P 500 (see below), the IWM pulled back last week. Fortunately, we took partial profits on our position weeks ago, and I plan to give this position more time (for now).

S&P 500 ETF (SPY) September 400 Puts – For better or worse our SPY puts are in good shape as we bought our hedge at the right time. We will continue to hold this position just in case the market continues to weaken.

Vale (VALE) June 17 Calls – VALE finally broke below 17 late last week, which is not ideal for our position. That being said, because we have partial profits in the bank, and this position has several months until expiration, I will give our trade more time.

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.