May 22, 2023
Not to repeat the intro from the previous week, but mega-cap tech again led the charge higher last week as the Nasdaq gained 3.38%, while the S&P 500 rose 1.55% and the Dow added a modest 0.32%.
And while the indexes rising was encouraging, traders remain concerned that the mega-caps are doing most of the heavy lifting while the action under the surface remains questionable.
Stocks on Watch
Option activity took a positive turn last week as call buying action came alive. Though of note, as I will show below, for better or worse, there was a TON of ultra-short-term call buying targeting a move higher for the market last week, and then this week. For example:
While I would love our recently purchased Uber (UBER) position to trade higher, this call buy from Friday is ultra-short term in nature:
Friday – Buyer of 10,000 Uber (UBER) May 39.5 Calls (exp. 5/26) for $0.55 – Stock at 39.
Similarly, I’ve been intrigued by Shopify (SHOP) ever since the stock exploded higher on earnings. And last week traders aggressively bought calls looking for a move higher in the short term, but also longer term:
Wednesday – Buyer of 15,000 Shopify (SHOP) May 63 Calls (exp. 5/26) for $0.75 – Stock at 60.5
Friday – Buyer of 5,000 Shopify (SHOP) June 60 Calls for $3.15 – Stock at 60.
Another earnings season winner I have my eye on is DraftKings (DKNG) which also caught a short-term call buy late last week:
Friday – Buyer of 4,000 DraftKings (DKNG) May 24 Calls (exp. 5/26) for $0.73 – Stock at 24.
I like both DKNG and SHOP, but it’s hard to get excited by trades targeting ultra-short term moves via cheap calls, especially when it’s happening EVERYWHERE.
And finally, if I wanted to be bearish on the market, the put buying has slowed down, though it hasn’t truly let up, in the financials and REITs as noted below:
Friday - Buyer of 3,000 Capital One (COF) September 100 Puts for $7.80 – Stock at 99.5
Friday - Buyer of 3,000 Digital Realty Trust (DLR) September 80/60 Bear Put Spread for $3.07 – Stock at 91.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 17.2 after trading below 16 at one point Friday. The “reason” the VIX rose on Friday is our friends in Washington, D.C. are seemingly farther apart on getting a debt deal done than many expected. I expect the VIX will have a hard time trading below 16 again until a deal is finalized.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 7
Thursday - 6
Friday – 6
Events for the Week to Come
Unfortunately we should expect countless rumors regarding the debt ceiling throughout this week, which will toss the market around in the short term. Also, traders will be focused this week on further inflation data Friday morning via the Personal Consumption Expenditures (PCE) for April.
On the earnings front the following companies will report this week, led by market leader NVDA on Wednesday:
What Traders are Saying
Last week the Financial Times did a deep dive into the struggles that investing legend Carl Icahn has had in the last several years. This is just another reminder that even the best traders in the world go through bad stretches that can last weeks, months or even years. Here is a small sample from the article:
“Carl Icahn has admitted he was wrong to make a huge bet that the market would crash after the ill-fated trade cost his firm nearly $9 billion over roughly six years. According to a Financial Times analysis, the prominent activist investor lost about $1.8 billion in 2017 on hedging positions that would have paid out if asset prices had tumbled before losing a further $7 billion between 2018 and the first quarter of this year.
“Icahn Enterprises, the listed vehicle majority owned by the activist that allows retail investors to join in his wagers, reported a total of $4.3 billion in short losses in 2020 and 2021 as markets quickly rebounded from the pandemic slump following the Federal Reserve’s huge stimulus. ‘I obviously believed the market was in for great trouble,’ said Icahn. ‘[But] the Fed injected trillions of dollars into the market to fight Covid and the old saying is true: ‘Don’t fight the Fed.’
“The trades have left Icahn in a vulnerable position and threaten to undermine his status as one of the most feared activist investors on Wall Street. Earlier this month, short seller Hindenburg Research released a report saying it believed the market value of Icahn Enterprises was inflated and its dividend was unsustainable. Shares of the company have fallen more than 30 per cent since the report was published.”
Stepping back, Carl Icahn will be fine, as he has made countless billions investing over his career. That being said, even the greats get trades wrong and have bad years from time to time.
Long positions: BABA, BAC, BSX, CLF, DIS, FTI, IWM, UBER
Bearish Positions: SPY
Alibaba (BABA) October 105 Call – BABA fell on earnings last week, which means it is on the chopping block. Essentially there are too many better-looking stocks where we should be investing our capital.
Bank of America (BAC) – The May 32 call that we sold for $0.38 expired worthless on Friday, leaving us with our stock position. Very soon, if the opportunity is right, we will sell a new call to further lower our cost basis.
Boston Scientific (BSX) November 55 Call – Last week we added to the portfolio the BSX November 55 call for $3.36. The strong stock performance combined with the repeated bullish option activity was a great set-up that I wanted to get involved with.
Cleveland-Cliffs (CLF) – The May 17 call that we sold for $0.48 expired worthless on Friday, leaving us with our stock position. Very soon, if the opportunity is right, we will sell a new call to further lower our cost basis.
Disney (DIS) September 105/130 Bull Call Spread – DIS, like BABA, is on the chopping block as the stock fell on earnings two weeks ago and has not bounced back since.
Though of note, on Thursday a trader bought 10,000 July 95/105 Bull Call Spreads for $2.80 – Stock at 93.
TechnipFMC (FTI) -- The May 14 call that we sold for $0.45 expired worthless on Friday, leaving us with our stock position. Very soon, if the opportunity is right, we will sell a new call to further lower our cost basis.
Russell 2000 (IWM) August 177 Call – The IWM gained 1.6% last week, and is again approaching our 177 strike price. Should the market get in gear, there is a chance (though no guarantee) that money could rotate into the small caps which have not participated in the rally the last month.
S&P 500 ETF (SPY) September 400 Put - Just in case our friends in Washington, D.C. make a mess of the debt ceiling deadline, we will continue to hold our SPY puts.
Uber (UBER) December 40/50 Bull Call Spread – After a not-so-hot start our UBER position came alive again on Thursday after Citigroup upped its price target on the stock to 57. The research note cited Uber distancing itself from the competition through innovation. By week’s end my thoughts are the stock looks great, option activity remains very bullish and our position is in good shape.