March 17, 2023
Blackstone (BX) Position Update and Sector on Watch
Yesterday the market staged a decent rally, though if you dug into the gains, it was mostly led by mega-cap growth stocks. Today, the hopes of yesterday’s rally are again fading as the stocks and sectors that have been weak continue to break down, led by the financials/banks.
Before I dive into the weakness in the banks, as well as the REITs, I wanted to note that we are holding a small Blackstone (BX) put position that is expiring this afternoon. With the stock trading at 83, it is likely that the balance our March 80 puts will expire worthless. That being said, I’m watching this situation as a move near 80 or below will require a sale of our position before the close of trade today.
Back to the market …
The financial sector is getting most of the attention from traders and talking heads this week. And while the action of GS/BAC/JPM trading at their recent lows is concerning, the REITs are also under a ton of pressure, with most making new 52-week lows as well. And into this weakness, traders are buying puts in the REITs as well as the financials this morning
Buyer of 4,000 Starwood Property Trust (STWD) April 15 Puts for $0.70 – Stock at 16.5 (REIT)
Buyer of 1,000 Boston Properties (BXP) October 35 Puts for $2.70 – Stock at 50.5 (REIT)
Buyer of 10,000 x 20,000 SL Green Realty (SLG) May 25/17.5 Bear Put Spread – Stock at 24 (REIT)
Buyer of 4,000 Blackstone (BX) April 85/70 Bear Put Spread for $4.20 – Stock at 84 (REIT exposure)
Buyer of 20,000 Ally Financial (ALLY) May 20 Puts for $2.21 – Stock at 22 (Financial)
Buyer of 3,000 Morgan Stanley (MS) July 92.5 Puts for $11.10 – Stock at 85 (Financial)
Stepping back, this is not an easy market. What I mean is, yesterday as the market rallied, I felt that the portfolio didn’t have enough bullish exposure. Fast forward to today, the market is getting hit again, and I feel we are too long.
For now, with so many crosscurrents, and ahead of the Federal Reserve meeting next week, my plan is to play it extremely safe.
March 14, 2023
Bearish Option Order Flow
Following a historic decline for bank stocks on Thursday and Friday of last week, and then again yesterday, my option order flow barometer has registered a 3 (pretty bearish) for three straight days. This is the longest such bearish streak since the start of Covid in March/April 2020.
Because of this bearish reading, I wanted to dive a bit deeper into this activity.
First off, clearly the put buying late last week was warranted as the collapse of SVB (SIVB) sent shockwaves through the sector and brought into question whether the entire system was yet again on the verge of collapse. These worries sent many Regional Bank stocks lower by 40-80%!!!
Today those stocks are flying higher on hopes that this “crisis” is over, or perhaps on short covering.
Regardless, I wouldn’t buy these stocks, or short them, as it’s my belief that the financials are a total toss-up as to where they will trade in the coming days.
That being said, I do want to note that option traders continue to bet against many of these stocks, though interestingly are doing so via far out-of-the-money puts. Here are some examples (focus on the strike price bought in comparison to the stock level):
Buyer of 5,000 Real Estate ETF (IYR) April 75 Puts for $0.65 – Stock at 85
Buyer of 5,000 Real Estate ETF (IYR) April 70 Puts for $0.45 – Stock at 85
Buyer of 8,000 Fifth Third Bancorp (FITB) April 20 Puts for $1.30 – Stock at 27.5
Buyer of 1,000 Charles Schwab (SCHW) June 32.5 Puts for $2.95 – Stock at 47
Buyer of 12,000 Wells Fargo (WFC) September 27.5 Puts for $0.77 – Stock at 39.3
Buyer of 7,000 Real Estate ETF (IYR) April 70 Puts for $0.47 – Stock at 83.5
Essentially, yesterday and today traders are no longer buying at-the-money puts and instead are buying doomsday puts.
Stepping back, I wouldn’t read too much into the doomsday put buying.
What I mean is it’s typical human (and trader) behavior to add to your insurance policy/puts after a disaster narrowly avoids destroying your house.
That being said, should put buying again target at-the-money puts, I may shed even more of our bullish exposure.
March 13, 2023
Weekly Update
Led by the meltdown in the financial sector, the market had an awful week. The numbers weren’t pretty as the S&P 500 fell 4.76%, the Dow lost 4.45%, and the Nasdaq declined 4.16%.
Hopefully this isn’t the start of another market meltdown. That being said, we have to be open to any possibility.
Stocks on Watch
Unfortunately, following another ugly week for the market, I have been crossing off more and more stocks from my watch list as the selling pressure has moved from one sector to the next. At some point the market will get back in gear and the big options players will get involved, but for now that isn’t the case.
That being said, below are a series of trades in financial stocks that I am interested to watch play out:
Friday - Buyer of 5,000 Morgan Stanley (MS) March 95/105 Bull Call Spread (exp. 3/31) for $1.75 – Stock at 92.5
Friday - Buyer of 12,000 Blackstone (BX) April 75 Puts for $3.50 – Stock at 81
Friday - Buyer of 5,000 Blackstone (BX) March 70 Puts (exp. 3/31) for $1.07– Stock at 82.
Morgan Stanley (MS) is thought to be a financial leader, and while the stock fell last week, it didn’t crater like so many of its peers. This bull call spread buyer is playing a bounce to new highs for the stock, and while I am not going to get involved as the sector looks awful, I’m intrigued by MS.
And finally, as I’ve noted for months, put buyers continue to come after Blackstone (BX) as the company’s leading REIT has been plagued by redemption requests, and the sector that includes KKR and APO got hammered last week. We have puts in BX that are expiring this Friday. Once those puts are sold or expire, we may get back involved.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 25, which was its highest close since December.
Of note, option activity took a meaningfully ugly turn late last week as my barometer posted back-to-back 3s, and that number at least on Thursday could easily have been a 2. However, that bearish option activity was almost exclusively focused on the banks and regional banks.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 3
Friday – 3
Events for the Week to Come
While the headliners of this week were thought to be the release of inflation data via CPI and PPI, and those data points will be important, clearly all eyes have shifted to the banking sector and the further reverberations after the collapse of SVB Financial (SIVB). It’s going to be a dicey week of trading!
On the earnings front, the following companies will release their quarterly reports this week:
What Traders are Saying
Last week’s collapse of SVB Financial (SIVB) brought back memories of the 2008 global financial crisis that brought down Lehman Brothers, Bear Stearns and others. Those were not fun times for younger Jacob on the trading floor as I was the lead market maker in Bank of America (BAC) as well as two other smaller financials. Every day was a roller coaster of rumors of the next bank to fail, and for a couple days it felt like the entire financial system was on the verge of collapse.
While I don’t believe we are headed to that Armageddon-level event again, I do want to note that back then, and again this week, the analyst community continued to tell investors that these Wall Street firms were OK, even when they weren’t.
We can see this happening yet again in the last two weeks, as JPMorgan gave SIVB a $177 price target and in prior months gave Silvergate (SI) an overweight rating and an $80 price target (Silvergate collapsed too last week).
And while JPM made the two mistakes noted above, they were not alone as SIVB had 12 buy ratings, 5 overweights, and not a single sell rating headed into last week.
My point is Wall Street firms get plenty right, but they also can get caught off guard by extraordinary circumstances. So for now, I wouldn’t rely too heavily on analysts’ recommendations, and instead would focus on the price action of many of these financial stocks that are now in question.
Open Positions
Long positions: BAC, DIS, FTI, JETS, VALE, IWM
Bearish Positions: SPY, BX
Bank of America (BAC) April 36 Covered Call – BAC had an awful week as the stock fell 11% along with its financial peers. At this point the April 36 call that we sold is likely headed to expiring worthless, which is fine.
Blackstone (BX) March 80 Puts – Our BX puts roared to life on Thursday and Friday as the stock fell apart. And as noted above in “Stocks on Watch”, traders are betting heavily against the stock in the coming months.
Disney (DIS) September 105/130 Bull Call Spread – While we still have six months until September expiration, I do have to admit my patience is running out when it comes to DIS stock, which has been bleeding for weeks.
TechnipFMC (FTI) April 14 Covered Call – FTI fell last week, though it’s still well above our short 14 strike price. This trade is working well.
Jets ETF (JETS) October 20 Call – On Tuesday and Wednesday of last week the JETS ETF looked on the verge of breaking out. Unfortunately the market then imploded Thursday and Friday, and the JETS fell with it.
Las Vegas Sands (LVS) March 44/60 Bull Call Spread – On Friday, in a risk management decision, I closed our LVS position for a profit of 191.58%.
I could easily see us jumping right back into LVS, or peers WYNN/CZR.
Russell 2000 (IWM) August 185 Call – The IWM traded horribly last week as the ETF has quite a bit of banking exposure, and even worse, that exposure is largely regional bank exposure. Bad week for the IWM!
S&P 500 ETF (SPY) September 400 Puts – For better or worse our SPY puts are now at a potential profit of approximately 50%. As you might imagine, given the weakness in the market I am going to continue to hold this bearish position.
Vale (VALE) June 17 Call – VALE fell last week, though it was hardly a disaster. That being said, the stock continues to run into a brick wall at 17 or above, which is not an ideal situation for our calls.
