June 8, 2023
Stocks on Watch – Shopify (SHOP) and Rivian (RIVN)
I’ve been “flirting” with adding Shopify (SHOP) to the portfolio for about a month now as the stock exploded higher on earnings in early May, and continues to attract call buying activity nearly every single day. For example, here is a super short-term call buy from this morning:
Buyer of 11,000 Shopify (SHOP) June 62 Calls (exp. 6/9) for $0.40 – Stock at 61
Despite this daily call buying, SHOP stock has mostly chopped around, having been rejected at the 64 level three times since earnings, and has also bounced nearly every time the stock breaks below 60.
SHOP is my number one candidate for a new position, though with the understanding that if we get involved, there will almost surely be some ups and downs.
Next up is Rivian (RIVN), which has also mostly chopped around for months. However, in the last two weeks a trader/traders have accumulated 85,000 July 17.5 calls via this type of daily call buying, which happened again this morning:
Buyer of 12,000 Rivian (RIVN) July 17.5 Calls for $0.45.
I’m not as high on RIVN as I am on SHOP. That being said, I did want to bring this unusual call buying activity to your attention if you were looking to add a speculative position.
June 5, 2023
Weekly Update
For the first time in weeks, and maybe even months, the markets advance felt broader, as more and more stocks participated in the market rally. That, as well as the VIX getting clobbered, has me encouraged … for now.
By week’s end the S&P 500 had gained 1.8%, the Dow had rallied 2%, and the Nasdaq had added another 2%
Stocks on Watch
Option activity heated up in the stocks that had been left behind late last week, as we may be on the precipice of a rotation into those sectors that have not yet participated in the rally … maybe. Here is a small sample of that action:
Commodity-related stocks have been gross underperformers this year as money has rotated out of those sectors (oil/steel/copper) and into mega-cap technology. However, starting on Wednesday traders began aggressively adding bullish positions in Freeport McMoRan (FCX) and Vale (VALE). Here are those trades:
Thursday - Buyer of 10,000 Freeport McMoRan (FCX) July 40 Calls for $0.70 – Stock at 35.5
Wednesday - Buyer of 8,000 Freeport McMoRan (FCX) August 37 Calls and Sale of August 27 Puts – Stock at 34 (bull risk/reversal)
Friday - Buyer of 5,000 Vale (VALE) November 14 Calls for $1.30 – Stock at 13.5
Thursday – Buyer of 25,000 Vale (VALE) July 13 Calls for $0.70 – Stock at 12.8
Wednesday – Buyer of 25,000 Vale (VALE) July 13 Calls for $0.63 – Stock at 12.7.
Even after FCX gained 7% late last week, the stock is still down 3% this year, while VALE is lower by 19% year-to-date. And while neither stock looks great, as we have seen in the past, when commodity stocks get in gear, the upside moves can be vicious.
Moving on to unusual call buying activity in the gaming space. As I noted on Thursday traders were aggressively buying DraftKings (DKNG) calls. And on Friday a trader/traders also bought short-term calls in Caesars (CZR). Here are those trades:
Friday - Buyer of 4,000 Caesars (CZR) June 43.5 Calls for $1.90 – Stock at 43.5
Buyer of 4,500 Caesars (CZR) June 48 Calls for $0.60 – Stock at 44.
The June 43.5 call I understand, as that is a way to get quick exposure to CZR stock moving higher. The June 48 call buy will need a pretty good move higher for this trade to work in the next two weeks, which is somewhat interesting.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 14.55, which is its lowest weekly close since February of 2020, which was just before the Covid pandemic rocked Wall Street.
The trend follower in me thinks this is a very bullish sign as traders don’t see a need for protection to the downside.
The contrarian in me is slightly nervous that this lack of fear is a warning sign that perhaps there is trouble ahead.
Stepping back, there will be a time to add more bearish positions, but with the VIX below 15 and the market’s breadth improving for now, it doesn’t feel like this is that moment to add put options.
Option Order Flow was fairly mixed/bullish this past week as my Options Barometer came in at:
Tuesday – 5
Wednesday – 5
Thursday - 6
Friday – 7
Events for the Week to Come
With the debt ceiling in the rear-view mirror, and the May Jobs data behind us, this week should be quieter on the macro front.
Of note, Fed Funds Futures are now pricing in a 35% chance of a 25-bps hike at the June Fed meeting … though to be frank, these odds have been moving violently depending on the day, and I would view this upcoming rate announcement next week as a total toss-up.
On the earnings front, it will be a fairly quiet week, with the following companies reporting:
What Traders are Saying
Let me start here … I have zero clue how the AI boom of the last month will play out. If I were to guess, it’s “real,” and there will be some monster stock winners in the years to come. However, there is no question that the media, and many of the companies themselves, are getting a bit hyperbolic with the mentions of AI. For example …
Below is a graph showing the number of AI-related mentions on earnings calls this quarter (though in fairness, the graph is a touch misleading as AI wasn’t really a thing in 2003.)
And to that point, even Snowflake’s (SNOW) CEO said on his company’s earnings conference call two weeks ago about AI, “We’re sort of at the peak of the hype cycle. The hard work really starts now.”
This of course brings me to the comic below, which @stockcats on Twitter updates every time there is a craze, and in years past has included crypto, the metaverse, marijuana and so on.
Open Positions
Long positions: BAC, BSX, CLF, DKNG, FTI, IWM, UBER
Bearish Positions: SPY
Bank of America (BAC) July 31 Call – BAC gained 1.36% last week, and into that rally we sold the July 31 call for $0.40. Of note, we will collect the $0.22 a share dividend later this month.
Boston Scientific (BSX) November 55 Call – BSX gained 1.5% last week, which is “fine.” Big picture, safe med-tech stocks weren’t in vogue last week as money raced into riskier plays.
Cleveland-Cliffs (CLF) July 16 Covered Call – CLF gained 5% last week, with most of those gains coming on Friday. Into that rally we sold the July 16 call for $0.62, which lowered our breakeven on this covered call to 15.29.
DraftKings (DKNG) January 25 Call – DKNG rallied 6.6% last week, looks terrific and options traders are aggressively buying calls, including a buyer of 2,000 August 25 Calls for $2.82 on Friday. Our position is in good shape.
TechnipFMC (FTI) June 14 Covered Call – FTI added 6.7% and our trade continues to work perfectly. Not much more to add.
Russell 2000 (IWM) August 177 Call – The IWM gained 3.6% on Friday which was its best one-day rally since late 2022. This advance put the IWM above its 200-day moving average for the first time since March, and very quickly our calls are coming alive.
S&P 500 ETF (SPY) September 400 Put – The SPY finally broke out of its maddening range late last week, which is good for the balance of our portfolio and bad for our SPY puts. Should this strength continue, we will sell our hedge.
Uber (UBER) December 40/50 Bull Call Spread – UBER gained 3.3% last week and looks great. Of note, on Friday as the stock made a run at recent highs a trader bought these two positions:
Buyer of 2,000 Uber (UBER) July 42.5 Calls for $0.92 – Stock at 39.75
Buyer of 2,500 Uber (UBER) September 47.5 Calls for $0.95 – Stock at 39.75.
