February 9, 2024
Stock on Watch – Amazon (AMZN)
I could write 20 paragraphs about the divergences in the market right now, but the highlight is simple … The indexes are trading at new highs, yet under the surface of what appears to be a strong market are plenty of stocks and sectors that are not participating in the advance, and many are actually weakening.
So, the question becomes, with a bullish portfolio, do we keep adding positions because the indexes are strong?
Or conversely, should we be buying puts as there are worrying signs under the surface?
To be honest, this is a confusing situation for nearly all traders as we all see the positives (indexes at highs, countless earnings winners), but also the potential dark clouds on the horizon (fewer than 40% of its stocks are above their 10-day avg, fewer than 60% above their 50-day, and fewer than 70% above their 200-day).
Hmmmm …
In terms of stocks on my radar to potentially buy if those clouds disappear is Amazon (AMZN) which soared higher on earnings last week, and yesterday and today is attracting interesting out-of-the-money call buying. Here are those trades:
Today - Buyer of 65,000 Amazon (AMZN) March 195 Calls for $0.55 – Stock at 173
Yesterday - Buyer of 85,000 Amazon (AMZN) May 215 Calls for $0.81 – Stock at 170
AMZN is one of the poster boys for this interesting market as the mega-cap technology stocks are leading the market higher again this year. And while we wouldn’t necessarily be early to a buy of AMZN, I am somewhat intrigued by this sizable call buying.
February 8, 2024
Position Update – PLTR
As I often do when one of our positions cross a “round number” in terms of profits, I wanted to update you that PLTR is trading at a new high at 25, and our April 19 calls are now at a potential profit of more than 100%.
I am going to continue to hold my position (for now), though I did want to bring these potential profits to your attention in case you wanted to ring the register on a piece of this wild stock.
Finally, I do want to note that option activity remains red hot, though not as insane as Tuesday (I’m not sure it’s possible to be as wild as Tuesday’s call buying).
February 8, 2024
Position Update - CELH
Yesterday and again this morning options traders have been accumulating positions in the Celsius (CELH) February 60 Calls (exp. 2/9). Here are those trades, and then my thoughts:
Yesterday – Buyer of 7,000 CELH February 60 Calls (exp. 2/9) for $0.25 – Stock at 57.25
Today – Buyer of 3,000 CELH February 60 Calls (exp. 2/9) for $0.30 – Stock at 58
So, the question I ask myself when I see super short-term call buying, that is out of the money, is why would someone do such a thing, when the trade is unlikely to succeed?
I’m fairly certain that this call buying is a play on Pepsi (PEP) earnings tomorrow.
The reason I say this is because Pepsi made an investment in Celsius in August of 2022, and on prior earnings calls Pepsi executives have briefly spoken about their relationship with Celsius and its sales.
In essence, this call buyer is getting cheap exposure to a move higher should a Pepsi bigwig drop a positive nugget about Celsius’ numbers … or in a dream scenario for our current position, perhaps PEP announces a takeover (unlikely, but you never know).
Regardless, I thought I would bring this option activity to your attention, and we will see how CELH reacts to PEP earnings tomorrow.
February 7, 2024
From “Hero” to “Zero” in One Day
Tuesday was going great for me as Palantir (PLTR) soared higher by 30% on earnings, and option activity into that move pointed to higher prices to come. Maybe, just maybe, we have a baby NVDA on our hands I thought (and continue to think).
Fast forward a couple hours, and I’m fairly confident that Snap (SNAP) will be our next big winner as the stock was setting up nicely, and option activity was bullish.
And there I was at my daughter’s basketball game after the market close, feeling good … until Snap (SNAP) absolutely cratered on disappointing earnings. The 30% decline in the stock is the worst possible scenario for our August call position. GRRRRR!
So, what are we going to do now regarding SNAP?
For the time being, I am going to hold our calls and see if the stock can bounce. Though to be honest, I don’t have high hopes that the stock is going to revisit 17 any time soon, and we may sell our position into any bounce.
Moving on to a brighter topic …
Ford (F) is trading higher by 3.5% today following earnings, and the stock is trading $0.50 above our short strike price. This is a great situation for our covered call that we will simply sit on and let the position continue to decay away.
February 6, 2024
Snap (SNAP) and Ford (F) Earnings
Today after the close both Snap and Ford will report earnings. Here are my thoughts on each …
SNAP is somewhat in the same category as PLTR … this has boom or bust written all over it.
What I mean is should Snap finally turn itself around as a company, and it has done a terrible job of delivering on earnings the last couple of years, the move higher could be explosive. Think PLTR (maybe).
Conversely, should Snap again miss expectations, the stock could get smoked. In fact, look at these AWFUL earnings reactions the last couple of years:
I’m going to hold on to my position and take the earnings risk as the stock looks good, option activity is strong, and maybe, just maybe, SNAP will deliver. Though as noted above, there is no question there is risk.
SNAP - With the stock trading at 17, the options market is pricing in a move of $3.25 this week, or 13.75 to the downside and 20.25 to the upside.
Open interest is skewed bullish on a ratio of 1.5:1 call vs. put.
Skew is pricing in extreme downside risk and upside interest.
Moving on …
I would assume the reaction to Ford’s earnings will be calmer than SNAP’s, though I suppose you never know in this wild market.
Regardless, I am going to hold my short volatility position through the event.
F - With the stock trading at 12, the options market is pricing in a move of $0.90 this week, or 11.10 to the downside and 12.90 to the upside.
Open interest is split evenly call vs. put.
Skew is pricing in typical downside fear and upside interest.
February 6, 2024
Position Update – Palantir (PLTR)
Palantir (PLTR) is trading higher by 30% today following earnings that beat expectations. Much like I wrote headed into the report, if the AI story delivered for Palantir the rally could be explosive.
So how is option activity looking following earnings, and into this big stock rally? It is WILDY, WILDY bullish. I’m talking off-the-charts call buying activity.
Now, some of that may be traders playing the momentum …
Or those that are short the stock covering via calls …
Or perhaps PLTR is the newest NVDA/SMCI type of star and this is just the start of a monster move higher.
To be honest, I don’t know, nor do I know if the stock will continue to move higher, or if the momentum will fade off. Essentially, this is an explosive situation, and I don’t want to begin to speculate how it will play out.
Regardless, our calls are back in good shape, and for now at least, we are going to hold our position looking for more upside to come.
February 5, 2024
Weekly Update
Before I dive into the Weekly Review I wanted to let you know that I was a guest on the Cabot Street Check podcast last Friday. The YouTube link is below, and I jump into the conversation at the 24:30 minute mark:
Moving on …
Despite some worries early in the week, the bulls once again bought the dip, and pushed the indexes near all-time highs. For the week, the S&P 500 and Dow gained approximately 1.35%, and the Nasdaq rallied 1.7%.
Stocks on Watch
While most earnings winners have initially popped following their announcements, and then traded sideways in the days that followed, I did want to note that call buyers on Friday were looking for much greater gains from market leaders Amazon (AMZN) and Meta (META), which rallied 8% and 20% on earnings. And following those big stock moves, here are just two of the many bullish trades in these tech titans looking for greater gains:
Buyer of 8,300 Amazon (AMZN) April 180 Calls for $5.05 – Stock at 171.5 (rolled from March calls)
Buyer of 6,500 Meta (META) January 500 Calls (exp. 2025) for $62 – Stock at 480.
I’m intrigued by both the stock moves and this call buying as it may be another banner year for the “magnificent seven” stocks.
And while I am encouraged by the market, and the strong stock reactions to the market leaders’ earnings reports, my only worry (for now) for the market is the put buying last week in the Regional Banks (KRE) and many Real Estate (IYR) related plays. Here is a small sample of this bearish activity:
Thursday - Buyer of 3,000 Blackstone (BX) June 115 Puts for $6.10 – Stock at 122.5
Thursday - Buyer of 5,000 Blackstone (BX) April 120 Puts for $5.30 – Stock at 124
Wednesday - Buyer of 4,000 Regional Bank ETF (KRE) March 45 Puts for $0.50 – Stock at 50.5
Wednesday - Buyer of 12,000 Regional Bank ETF (KRE) May 46 Puts for $1.40 – Stock at 51
Wednesday - Buyer of 2,000 Starwood Properties (STWD) September 18 Puts for $0.80 – Stock at 20.5
Wednesday - Buyer of 3,400 Ares Capital (ARCC) June 20 Puts for $1 – Stock at 20.25.
In the short term, the market has handled the weakness in the Regional Banks and Real Estate well, and because of that I’m encouraged. That being said, I absolutely have my eye on these sectors.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 14, which was mostly unchanged. This is somewhat surprising to me as I would have assumed that now that the Federal Reserve announcement and January Jobs Report have passed, and a great deal of market leaders have reported earnings, I would have thought that the VIX would be at 13 or below.
If I were to speculate as to why the VIX didn’t fall this last week despite many worries passing, it might be due to the fears about the Regional Banks (KRE).
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 6
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 6
Events for the Week to Come
This week is very light in terms of economic data, though it continues to be heavy in terms of earnings reports, including Caterpillar (CAT) today, Eli Lilly (LLY) and Snap (SNAP) on Tuesday, and Disney (DIS), PayPal, (PYPL), and Uber (UBER) on Wednesday, as well as countless others, noted below.
What Traders are Saying
I received two questions from a Cabot Options Trader subscriber last week that I wanted to share with the larger group, as I thought they would be of interest to you all. Here are those questions, and my answers, broken up into two:
COT Subscriber: I was wondering what the best outcome is when you make a covered call. … Do you want the stock to stay sort of flat and just collect the call premium?
Jacob: It really depends on your goals with the trade. And I will use our Ford (F) trade from Friday to illustrate what I mean.
If you want to make approximately 3-6% in a month, and then walk away with your profits and move on to a new opportunity, then you want the stock to trade higher and above the strike price of the call you sold (in the case of F, above 12 on February expiration).
If you want to make 2-4% in a month, and keep the trade going month after month, then you want the stock to chop around, close below 12 in the case of F, at which point the call expires worthless, and then you/we could sell a new call.
The worst-case scenario for a covered call is the stock tumbles dramatically.
For me personally, when I execute a covered call I’m looking to make the yield/profit, have my position called away, and then move on to the next trade/opportunity.
COT Subscriber: Also – just curious – will NVDA just keep going up forever?
Jacob: Forever is a long time, so probably not. That being said, a Cabot saying is “trends can go much further that you can imagine.” And on Friday, and really all week, traders continued to buy wild out-of-the-money calls in Nvidia (NVDA) and Super Micro Computer (SMCI), as noted below:
Buyer of 1,000 Nvidia (NVDA) August 1200 Calls for $3.40 – Stock at 665 ($535 out-of-the-money!)
Buyer of 1,000 Super Micro Computer (SMCI) March 800 Calls for $8 – Stock at 585 ($215 out-of-the-money).
At some point these stocks will fall, but I can tell you that I’m not betting against them given the stock momentum and the call buying.
Open Positions
Celsius (CELH) July 60 Call – CELH gained 2% last week, with most of those gains coming on Friday following an upgrade by Wall Street firm Maxim, which upgraded the stock from Hold to Buy, noting CELH’s strong fundamentals are undervalued.
Ford (F) February 12 Covered Call – On Friday we added a short volatility covered call in F, ahead of earnings on Tuesday morning. Should F stock close above 12 on February expiration, which is our ideal scenario, we will walk away with a yield of 3.35% in two weeks’ time.
Li Auto (LI) June 40 Call – Last week we took a partial loss on our LI position as the stock, and it’s China peers, continue to be under intense selling pressure. Because we have five months until our calls expire, I will give this trade a bit more time.
Marvell (MRVL) August 70 Calls – There aren’t many stocks that I watch that so consistently attract as much call buying as MRVL. Here is a small sample of this action from last week:
Wednesday - Buyer of 2,000 Marvell (MRVL) February 70 Calls for $1.55 – Stock at 68
Buyer of 2,200 Marvell (MRVL) March 80 Calls for $1.50 – Stock at 69
Buyer of 2,000 Marvell (MRVL) April 77.5 Calls for $2.71 – Stock at 68
Monday - Buyer of 3,000 Marvell (MRVL) April 80 Calls for $2.40 – Stock at 69
Nutanix (NTNX) April 37.5/65 Bull Call Spread – NTNX closed at a new 52-week high on Friday and our position is now at a potential profit of approximately 360%.
Palantir (PLTR) April 19 Call – PLTR will report earnings this morning. Not much to add until the numbers are out, and more importantly, how the stock reacts to those numbers.
Equal Weight ETF (RSP) June 158 Calls – The RSP is trading near its highs, though didn’t “explode” higher last week as most of the action in the market was in the mega-cap technology stocks.
Snap (SNAP) August 17 Calls – SNAP traded back above 17 following “peer” META’s strong earnings on Friday. Snap will report earnings on Tuesday after the market close, which will likely make or break our position.
TJX (TJX) April 92.5 Calls – TJX closed Friday at a new 52-week high, and looks terrific. Not much more to add as this stock continues its slow ascent.
Financials ETF (XLF) March 33 Put – Our XLF puts are essentially a “back-pocket” hedge against a steep market decline at this point.
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