August 13, 2024
Stock on Watch – LMT
In the last couple of days/weeks there has been unusual call buying activity in Lockheed Martin (LMT), targeting a fairly big move higher in the next month. Here are those trades:
8/1 – Buyer of 2,000 LMT September 595 Calls for $2.50 – Stock at 549
8/12 – Buyer of 4,000 LMT September 600 Calls for $2.90 – Stock at 555
I am not a big fan of buying calls 9% out-of-the-money with a month until their expiration, and because of that I am not going to get involved with these trades … unless I see further call buying activity.
And while I am not going to buy LMT just yet, this out-of-the-money call buying in a defense contractor is somewhat interesting given the various “fires” across the globe.
August 12, 2024
Weekly Update
Before I dive into this morning’s Cabot Options Trader Weekly Update, I wanted to bring to your attention that the Mintz family will be traveling to Europe this Wednesday through the following Wednesday.
And while I will be offline in terms of trading, answering questions, and the Daily Order Flow list, I will keep a distant eye on our positions and if we need to act, I will send instructions.
Moving on …
That was an all-timer of a week as the S&P 500 at the lows on Monday was down nearly 5%, and then managed to finish the week mostly unchanged. Now that is some volatility!
By week’s end the S&P 500 was virtually unchanged, the Dow had fallen 0.6%, and the Nasdaq had lost 0.2%.
Stocks on Watch
As noted above, I will be traveling out of the country Wednesday through the following Wednesday. And while I will be stepping away from the market, I do want to note, if the market continues to strengthen, and if option order flow gets hot in a stock I like, we still could buy today or tomorrow. But let’s see if the market can string together more than a day or two of solid action before getting too excited.
One trade that I wanted to highlight from last week is in Scorpio Tankers (STNG), which is a stock I’m very familiar with going back to my days as a Market Maker on the floor of the Chicago Board of Options Exchange (CBOE). First, here is the trade, and then I will go into why this trade is interesting:
Friday - Buyer of 1,400 Scorpio Tankers (STNG) September 70 Calls for $6 – Stock at 74.
I have a bit of a history with STNG, as this was a stock that I used to be a market maker in. Interestingly, every couple of months a trader would come into our trading crowd and buy in-the-money calls, much like these 70 strike calls above. And a couple weeks later, via company disclosures, it would come out that the CEO of Scorpio Tankers was the call buyer!
That’s right, the CEO would buy in-the-money calls, which is evidently legal!
And if you were to do a Google search for “STNG CEO Call Buying” you would see these past headlines highlighting his options trading:
Aug 12, 2021 — Robert Bugbee, the well-known President of NYSE-listed Scorpio Tankers (NYSE: STNG), spent another $465,000 on STNG call options on Wednesday.
Jan 4, 2023 — The President of the Company, Robert Bugbee, has purchased call options on 400,000 common shares (or 4,000 call option contracts) of the Company.
Feb. 15, 2024 – Scorpio Tankers Inc. announced that the President of the Company, Robert Bugbee, has purchased call options on an aggregate of 555,600 common shares (or 5,556 call option contracts) of the Company for total consideration of $7.0 million. The call option contracts have a strike price of $60.00 and an expiration of September 2024.
So how did these trades work out? I would say the CEO’s call buying win rate was probably 50/50. Sometimes he would get the direction of the stock right, and sometimes he would not. Essentially, even the CEO of the company doesn’t know where the market or his stock is going in the short term.
Now I will say, I don’t know (yet) if this call buy above was made by the CEO of STNG, but I thought this was an interesting situation that I am somewhat familiar with, and that I wanted to bring to your attention.
Volatility and What Traders are Saying
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 20, having traded as high as 66 on Monday morning. While I felt in the moment that the VIX at 66 was INSANE given the market’s somewhat “meh” worries, and with the perspective that this was the highest level for the “Fear Index” since the Covid Crash and the Housing Meltdown, I will admit the market’s decline was concerning in the moment.
And while the Dow falling more than 1,300 points on Monday will go down in the history books, as shared by Edward Jones, it was “only” the 12th-largest daily decline for the Dow in its history, as seen below:
So, what caused this market meltdown?
As I noted last week, it could have been anything from Middle East concerns, the Japanese Yen Carry Trade unwinding, or perhaps growing fears of a recession in the U.S. – or all of the above. Though as Michael Antonelli on Twitter pointed out, we saw similar recession worries and headlines in 2022, which never came to fruition:
And finally, as the market was melting down, just days after the Federal Reserve did not cut interest rates, many traders began to speculate that the Fed might need to cut interest rates very soon to stave off a recession and a market crash. I doubt the Fed is going to do so, and Bank of America agrees, as shared in this research note early last week:
Bank of America: History suggests the bar for intermeeting [Fed] cuts is extremely high and conditions on the ground today do not warrant such action. Could we get there? Sure. We cannot predict the future and our view on the fundamental health of the economy and vibrancy of financial markets may be misplaced. But if the question is, ‘should the Fed consider an intermeeting cut now?,’ we think history says, ‘no, not even close.’
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 6
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 6
Events for the Week to Come
Coming off a crazy week for the market, this week there are a handful of market-moving events led by July PPI Inflation Data on Tuesday and July CPI Inflation Data on Wednesday, as well as three Fed speakers who may weigh in on the Japanese Yen Carry Trade and recent market volatility.
And while earnings season is starting to slow down, this week’s earnings slate will start to transition from a tech focus to retail plays led by Home Depot (HD) on Tuesday and Wal-Mart (WMT) on Thursday.
Open Positions
Robinhood (HOOD) January 15 Call – HOOD bounced back nicely following earnings late last week, though the stock has a long way to go until it reaches its highs from mid-July (like most stocks). Regardless, our position is now at a potential profit of approximately 75%.
Hewlett Packard (HPE) January 22 Calls – Our HPE trade is not working as the stock has come under pressure along with most stocks that had rallied on AI excitement. Though of note, on Thursday a trader bought 1,000 Hewlett Packard (HPE) November 20 Calls for $0.60 – Stock at 17.3.
Lyft (LYFT) August 16 Covered Call – LYFT got nailed on earnings, which is not great … though after that initial stock sell-off call buying immediately ramped up looking for a rebound, and the stock did bounce a bit.
Please note, we will simply let the August 16 call expire worthless this Friday, and you will not need to act on this trade on expiration.
Finally on LYFT, here is a small sample of the call buying into the stock decline last week:
Wednesday – Buyer of 4,000 Lyft (LYFT) October 11 Calls for $0.60 – Stock at 9.70.
Marijuana ETF (MSOS) September 9 Covered Call – The MSOS chopped around aimlessly last week which is totally fine for our short volatility trade. Of note, the September 9 calls that we sold for $0.54 are now worth $0.25.
On Holding (ONON) January 42.5 Calls – ONON will report earnings tomorrow morning before the market open, and this will be a make-or-break stock reaction for our position. I will update what the options market is pricing in for the earnings move later today.
Palantir (PLTR) January 26 Calls – If we didn’t already own PLTR, we would be buying it as the stock looks amazing following blowout earnings last Monday, option activity is red hot, and the stock looks like the emerging leader in the AI space.
Of note, here is a small sample of the call buying in PLTR late last week:
Thursday - Buyer of 1,000 Palantir (PLTR) October 35 Calls for $0.80 – Stock at 28.25
Friday - Buyer of 5,000 Palantir (PLTR) September 32 Calls for $1.25 – Stock at 29.5.
Nasdaq ETF (QQQ) November 430 Puts – There was no better illustration of why we are holding our QQQ puts than Monday when the Nasdaq “crashed.” As the old trading saying goes, “Buy puts when you can, not when you have to.”
Unity Software (U) December 18 Calls – U rallied 8% following earnings on Thursday evening that were “meh.” And while the earnings were not inspiring, at least one research report that I read following earnings pointed out that the company may have thrown all the bad news into this earnings report, and that there are signs that the company is in the midst of a turnaround.
Regardless, following earnings, call buying definitely ramped up, including these far out-of-the-money call buys:
Buyer of 3,000 September 22 Calls for $0.16 – Stock at 16
Buyer of 1,500 November 24 Calls for $0.46 – Stock at 16.
Walmart (WMT) January 65 Calls – WMT will report earnings Thursday before the market open. My plan is to send the earnings preview later today, as I will be out of the country ahead of the reporting day. Stepping back, our position remains in great shape headed into the earnings announcement.
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