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Week of January 23, 2023

It was hardly smooth sailing for traders last week, as the indexes got hit hard on Wednesday and Thursday, and then roared back to life on Friday.

January 25, 2023
LVS/BX Earnings Previews

This afternoon Las Vegas Sands (LVS) will report earnings after the close. Having taken partial profits on the first two-thirds of our position, I am going to take the earnings risk, and hold the balance of my position through the announcement.

However, if you don’t want to take the risk and would prefer to lock in your potential profit of more than 100%, you must sell your position before the close of trading today.

LVS - With the stock trading at 55, the options market is pricing in a move of $3 this week, or 52 to the downside and 58 to the upside.

Open interest is skewed bullish on a ratio of 1.3:1 call vs. put.

Skew is pricing in typical downside risk and upside interest.

Next up is Blackstone (BX), which will report earnings tomorrow before the open. The stock has rebounded nicely since we took partial profits on our position, which is not ideal for our bearish play.

Because we “need” bearish exposure to the overall market, I am going to hold the final quarter of our position (we only bought a half of a position initially).

That being said, if you would prefer to exit this trade ahead of earnings, you must sell to close before the end of the trading day.

BX - With the stock trading at 87, the options market is pricing in a move of $4 this week, or 83 to the downside and 91 to the upside.

Open interest is skewed bearish on a ratio of 2.3:1 put over call.

Skew is pricing in extreme downside risk, as well as upside interest.

January 23, 2023
Weekly Update

It was hardly smooth sailing for traders last week, as the indexes got hit hard on Wednesday and Thursday, and then roared back to life on Friday. By week’s end, the S&P 500 had lost 0.66%, the Dow had fallen 2.7%, and the Nasdaq had risen by 0.65%, which was its first three-week win streak since August.

This week earnings season ramps up in a big way.

Stocks on Watch

For the first time in a month, though not surprisingly given the holidays, option activity heated up last week. Hopefully this is the start of a run for the market, and unusual option activity. Let’s dive in …

Racing to the top of my watch list is former growth leader Shopify (SHOP), which had a wild week of call buying, including these trades below:

Wednesday - Buyer of 30,000 Shopify (SHOP) June 30 Calls for $12.53 – Stock at 40 (rolled from January 25 calls)

Friday - Buyer of 2,500 Shopify (SHOP) March 44 Calls for $2.40 – Stock at 40

Friday - Buyer of 13,000 Shopify (SHOP) January 41 Calls (exp. 1/27) for $0.75 – Stock at 40

Friday- Buyer of 4,000 Shopify (SHOP) February 45 Calls for $1.33 – Stock at 40.

The Wednesday call buy was a purchase of $37.5 million in premium, and is intriguing.

Throw on top of that the call buying on Friday in which calls outpaced puts on a ratio of 3.1:1, and all of a sudden I’m now very interested in SHOP.

Next up is Disney (DIS), which had attracted bullish option activity in recent weeks, and then saw a real surge in call buying last week, including these trades:

Wednesday - Buyer of 8,000 Disney (DIS) March 110 Calls for $2.38 – Stock at 100.5

Thursday - Buyer of 5,000 Disney (DIS) April 110 Calls for $2.53 – Stock at 98.

DIS will report earnings in two weeks, which could be the catalyst this call buyer is targeting. Or, the call buyer could be targeting changes for the company, as activist Nelson Peltz has built a large position and is agitating for change to enhance the share price.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 19.75, or higher by 7.63% on the week.

Here’s an interesting note from @RyanDetrick on Twitter regarding the recent “low” levels in the VIX:

“Since 1990 the VIX has averaged 19.66. In other words, 20 isn’t low, it just feels that way because of the recent higher vol regime. The big takeaway is we tend to see years of the VIX consistently >20, and years it stays <20.”

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

Somewhat sarcastically, traders are celebrating that we have reached the Fed “blackout period,” which means Fed officials won’t speak publicly until the February 1 meeting. Enjoy the week and a half off from the many Fed members contradicting each other (I’m mostly joking).

In the absence of Fed speeches, earnings season ramps up in a big way this week. Here are the reports traders will be most focused on, led by Microsoft (MSFT) on Tuesday and Tesla (TSLA) on Wednesday:

COT_Issue_01-23-23.png

What Traders are Saying

Last week we closed the final piece of our Starbucks (SBUX) position. The profits of 200.6% for Cabot Options Trader subscribers and 350.91% for Cabot Options Traders Pro members were awesome, especially given the awful market action since we added this bullish position.

With the trade now closed, I wanted to dive into the mechanics of the PRO trade, for educational purposes.

To refresh, both services bought the SBUX January 85 calls for $6.57 in late July, following a surge in call buying activity.

Shortly after, both portfolios took partial profits of 20% on half, and then let the balance of the trade run.

However, as the stock ran higher, the Pro members turned this trade into a Bull Call Spread by selling the January 110 calls for $1.55. This was now the January 85/110 Bull Call Spread.

While this adjustment limited our upside exposure in SBUX, I felt, given the awful market conditions, collecting $1.55 via the call sale, which lowered our cost basis to $5.02, was the right risk/reward opportunity.

This adjustment proved to be the right play as SBUX continued to grind higher but never really tested the 110 strike that we had sold.

Then last week, as expiration was approaching, Pro subscribers made one more adjustment to again lower our cost basis. We bought back the 110 calls that we had sold for $1.55, for $0.19, and then sold the January 107 calls for $0.85, which lowered our cost basis on the position to $4.36.

While this adjustment was being “cute,” again I felt that collecting another $0.66, and again lowering our cost basis, was the right decision, especially given the uncertainty in the market.

Finally, on Thursday we closed the Pro position as the market was getting hammered and time was running out on both trades.

Stepping back, turning this trade into a Bull Call Spread worked very well. Though admittedly, in wild bull markets, which we are not currently in, this adjustment could have been a mistake if SBUX truly exploded higher.

Open Positions

Long positions: BAC, GOOG, LVS, PYPL, PINS, VALE, IWM

Bearish Positions: SPY, BX

Bank of America (BAC) February 36 Covered Call – BAC lost 4% last week, which is fine for our short volatility position. Of note, the February 36 call that we sold for $0.44 is now worth $0.20, as option decay is slowly eating away at this option (good).

Blackstone (BX) March 80 Puts – BX had a wild week, with many ups and downs, though by Friday the stock was unchanged. Earnings will be released on Thursday, and I would expect the main event for this announcement will be a deep dive into the “troubled” BREIT fund.

Also of note, peer KKR last week limited withdrawals from one of its property funds, much like BX was forced to do last month. This will all be interesting to see play out in the months to come.

Biotech ETF (XBI) January 84 Call – On Wednesday we took a loss on the final third of our XBI calls. While the biotechs look decent, time had simply run out on our call position.

Alphabet (GOOGL) February 120 Calls – GOOGL gained 7% last week, though as I’ve noted recently, we need a much bigger move higher for our calls to really come alive. Earnings in early February are our best hope.

Cameco (CCJ) January 24.5 Covered Call – CCJ closed above our 24.5 strike price, which means we no longer own a stock or option position. I would expect this capital will move into earnings season winners in the weeks to come.

Las Vegas Sands (LVS) March 44/60 Bull Call Spread – LVS was mostly unchanged last week, which isn’t terribly surprising given the stock move higher in recent weeks. Our bull call spread is now at a potential profit of approximately 150% ahead of earnings on Wednesday.

than the stock was upgraded by Wall Street firm Baird on Thursday. Below are some of the details of that upgrade.

“We believe steady (or even accelerating) integration with digital wallets suggested by our quarterly merchant survey is a positive tailwind for PayPal, despite creeping competition from alternative checkout buttons. While we expect generally in-line Q4 results and prudently cautious initial Q1/2023 guidance (macro headwinds, lagging e-commerce growth), we believe that greater operating efficiency should ultimately lead to solid free cash flow generation and mid-teens EPS growth this year, while longer-term digital payment and online spending trends remain in PayPal’s favor.”

Pinterest (PINS) March 25 Call – Much like PYPL, PINS was unchanged last week. I continue to think IF the market can get in gear, PINS could bust out to the upside given its strength in the face of a so-so market.

Of note, on Thursday a trader bought 2,000 Pinterest (PINS) February 26 Calls for $2.44 – Stock at 26.5 (rolled from January calls).

Russell 2000 (IWM) August 185 Call – The IWM fell 1% last week with most of those losses coming Wednesday and Thursday. Big picture, our calls are a longer-term play, and I’m not terribly concerned by a couple days of losses.

S&P 500 ETF (SPY) March 420/320 Bear Put Spread – Now that we’ve closed our SBUX and XBI positions and have taken partial profits in LVS/VALE/etc., the question becomes do we still need our hedge. There isn’t an easy answer, as Wednesday’s and Thursday’s declines tell me yes, while Friday’s rally leads me to believe no.

Starbucks (SBUX) January 85/107 Bull Call Spread – As noted above, we closed our SBUX bull call spread for a profit of 350.91% on Friday. This trade worked spectacularly in a terrible market.

Vale (VALE) June 17 Calls – VALE was down marginally though it looks terrific having closed the week just below its recent highs. Our calls are in great shape.


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.