July 7, 2023
Position Update and Stock on Watch
The trading week has been fairly slow, which was expected given the holiday-shortened week.
And while most of our positions have largely chopped around with the market this week, DraftKings (DKNG) is a standout as the stock is once again approaching its recent highs following an upgrade this morning.
The gist of the upgrade is Oppenheimer raised their price target on the stock to 36, up from 30, on higher revenue forecasts following state gaming reports implying stronger product engagement.
I continue to really like the way DKNG stock has been performing, as well as the option activity, and have high hopes for our position as long as the market continues to strengthen.
In terms of stocks on my radar for a potential new buy is Transocean (RIG) which is an oil and gas-related play that is busting out to a new multi-month high today and has attracted several days of call buying, including these trades the last two days:
Today - Buyer of 4,000 Transocean (RIG) August 8 Calls for $0.40 — Stock at 7.5
Today - Buyer of 5,000 Transocean (RIG) July 7.5 Calls (exp. 7/14) for $0.30 — Stock at 7.5
Thursday - Buyer of 10,000 Transocean (RIG) August 8 Calls for $0.37 — Stock at 7.4
After being an oil and gas leader for many years, RIG has mostly been left for dead since 2012/2013 when the stock began its slide.
And while the stock rebounding from 5.5 to 7.5 is hardly an explosive move higher, I do have my eye on the stock and option activity looking for further strength.
June 30, 2023
You are receiving the typical Monday morning update today as the Cabot office will be closed on Monday, and then the stock market is closed on Tuesday. Have a great Fourth of July weekend!
Stocks on Watch
Having added Intel (INTC) to the portfolio on Wednesday, and with a somewhat full portfolio, I’m not racing to do a ton more buying. That being said, option activity NEVER sleeps, and earnings season will start again in two weeks, so I wouldn’t be shocked if we added even more positions in the days/weeks to come.
Speaking of earnings season, I wanted to highlight how hedge funds often get next-level exposure during earnings season. Let’s dive in …
Nike (NKE) reported earnings yesterday after the close. In reaction to those earnings NKE stock is down marginally this morning. However, the stock reaction isn’t why I bring up NKE.
Instead, what is of greater importance option education wise is how traders bought call options ahead of those earnings in Nike’s “peers.” Here are two trades from Tuesday:
Buyer of 2,000 ON Holding (ONON) August 35 Calls for $1.25 – Stock at 31.40 (shoe company, like Nike)
Buyer of 6,000 Academy Sports (ASO) July 55 Calls for $1.05 – Stock at 52.5 (sells Nike shoes).
The thought process behind these call buys, if I were to make an educated guess, is to buy calls on stocks that will move higher if NKE’s stock reacts well to earnings. And because neither ONON or ASO were reporting earnings, the option volatility in those stocks was not elevated like it was in NKE. (ONON is higher by 3.5% today, while ASO is unchanged.)
We see this second derivative option trading oftentimes in stocks like Apple (AAPL) ahead of earnings, when traders buy calls/puts on the semiconductor stocks that supply chips to Apple, and along the same lines I would expect we will see traders place AI bets going forward ahead of Nvidia’s (NVDA) earnings.
The Chicago Board of Options Exchange Volatility Index (VIX) is trading at 13.40, which is mostly unchanged on the week. It appears, at least in the short term, that the 13 level (approximately) is the new floor for the “fear index.”
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 6
Thursday - 5
Events for the Week to Come
Please note, the Cabot offices will be closed on Monday, and the stock market will be closed for the Fourth of July. This should make for a somewhat quiet week … until the June Jobs Report on Friday.
What Traders are Saying
The market has been on a nice run in 2023, and perhaps we are due for even more gains, as July has been the best month for the market the past 10 years, as shown below by @ryan detrick on Twitter (and highlighted by the blue arrow).
Aiding the market this year is the possibility that the U.S. economy will not fall into a recession, as U.S. economic data has delivered the most positive surprises since 2021, as seen below:
Maybe, just maybe, the U.S. economy will avoid the long-expected recession, and by some miracle we will get a soft landing.
Long positions: BAC, BSX, CLF, DKNG, IWM, SHOP, UBER
Bearish Positions: QQQ
Bank of America (BAC) July 31 Covered Call – BAC is up 4% this week as all of the major banks passed the Federal Reserve’s “stress test,” which sparked a sector rally.
Boston Scientific (BSX) November 55 Call – BSX is mostly unchanged this week. Not much more to add.
Cleveland-Cliffs (CLF) July 16 Covered Call – CLF is higher by 6% this week, and is now trading $0.75 above our short strike price. This trade is working well.
DraftKings (DKNG) January 25 Call – DKNG is higher by 5% this week, and looks terrific. Option activity remains very strong and our position is in great shape.
Intel (INTC) January 34 Call – On Wednesday we added the INTC January 34 call to the portfolio for a price of $3.74 following weeks of bullish option activity. The stock is down marginally since we entered our trade (though is up today).
Russell 2000 (IWM) August 177 Call – The IWM is higher by 4% on the week, and is testing its recent highs.
Nasdaq ETF (QQQ) December 370 Puts – On Tuesday we sold a third of our QQQ puts for a 14% profit. Certainly not a home run, but for now at least that sale was the right move.
Shopify (SHOP) January 62/90 Bull Call Spread – SHOP is higher by 2% on the week and looks terrific. Of note, on Wednesday a trader bought 3,000 July 70 Calls for $1.30 – Stock at 65.
On Monday we sold the January 90 call for $3.05, which turned our trade into the January 62/90 bull call spread for a net cost of $7.84.
Uber (UBER) December 40/50 Bull Call Spread – UBER is mostly unchanged on the week, though it did receive an upgrade from Wall Street firm Bernstein, who wrote: “UBER has the potential to be one of the most compelling FCF growth stories in (the) Internet over the next 2-3 years. Furthermore, we think the introduction of buybacks is plausible. Lastly, we believe S&P 500 inclusion is on the table.”