December 21, 2022
Stocks on Watch – VALE and BA
Earlier this month we bought a half position in the VALE June 17 Calls for $1.81 following a surge in call buying activity. The reason we bought a half position, rather than a full position, was the market was suspect at the time, plus, playing commodity stocks can be dicey.
VALE stock is essentially unchanged since we bought our calls, which is super impressive given the market’s weakness … though admittedly decay has weighed on our calls a touch.
Interestingly, today, a trader bought 5,000 of the June 17 calls that we own for $1.64. This call buy, along with the strong/steady stock action, has me debating if we should fill out our position. Hmmm.
In terms of other stocks on my radar, for a new position is Boeing (BA), which is up 37% in the past three months, while the S&P 500 is mostly unchanged in that same timeframe. And this afternoon, with the stock making a new multi-month high, a trader bought the following bull call spread looking for further gains next year:
Buyer of 10,000 Boeing (BA) March 220/245 Bull Call Spread for $4.30 – Stock at 195
BA has been a stock disaster for the past several years. That being said, it appears traders are warming back up to the stock, and I will watch for further bullish option activity in the days to come.
December 19, 2022
Weekly Update
Despite a strong start to the week that saw the S&P 500 gain a combined more than 2% Monday and Tuesday, the sellers once again took control, as the index then fell 4.5% Wednesday and Thursday.
By week’s end the S&P 500 had lost 2.5%, the Dow had declined by 1.9%, and the Nasdaq had fallen 2.77%.
Stocks on Watch and Volatility
This week I am going to combine the Stocks on Watch and Volatility sections after I received a question from a subscriber along the lines of, “How worried are you about the market?”
The reason I am combining these two sections is there are some positives I see right now, as well as some worrisome points, that combine option activity and the VIX. Let’s dive in …
My worries are tied to three items:
First, option activity swung bearish Thursday and Friday of last week, as seen below:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday – 4
Friday – 4
This option activity wasn’t a disaster, but I would note that there was very little call buying into the late-week market decline.
Next up on my worry list is the gross action in the banks/financials last week, as well as the bearish option activity, including these trades:
Friday: Buyer of 3,500 SPDR S&P Regional Banking ETF (KRE) March 53 Puts for $1.70 – Stock at 57
Thursday: Buyer of 3,000 Blackstone (BX) January 78 Puts (exp. 1/6/2023) for $3.40 – Stock at 79.5
Thursday: Buyer of 3,000 Capital One (COF) March 85 Puts for $4 – Stock at 94
Wednesday: Buyer of 3,500 Blackstone (BX) February 75 Puts for $4.25 – Stock at 81.30
Tuesday: Buyer of 1,300 BlackRock (BLK) January 700 Puts for $17.60 – Stock at 735
Tuesday: Buyer of 5,000 Blackstone (BX) February 70 Puts for $2.37 – 83.
As an “old school” trader, my radar goes up when the financials are weak.
And finally, once again the best-looking stocks ran into resistance last week and were subsequently punished. This continued lack of stocks breaking out, and in fact getting killed on the slightest weakness in the market, leads me to believe the institutions and hedge funds aren’t yet believers.
Now the bullish signs I am seeing:
VERY interestingly, the Chicago Board of Options Exchange Volatility Index (VIX) FELL 2% last week despite the S&P 500 losing 2.5% and closing near its recent lows. When the VIX isn’t racing higher into market weakness, this typically means the downside is limited for the indexes.
Second, while the close last week was not encouraging, when stepping back the market has mostly traded sideways since late October and is approximately 9% above the early October lows, despite the Federal Reserve continuing to raise interest rates and speaking hawkishly.
And finally, while I am not going to add exposure just because of this, I would note that we are just now entering a very bullish time of the year for the market as the run-up to Christmas, starting on the 15th/16th of December, and into year-end tends to be strong for stocks.
Moving on …
The winner of the “best crook of the week” goes to the trader who bought 4,700 Maxar Technologies (MAXR) February 25 Calls for $1.55 with the stock trading at 22.8 on Thursday of last week, as seen below. Notice how he/she bought calls in smaller lots (1-140 contracts) rather than buying all 4,700 contracts in one buy, so as to not raise suspicion:
How did that trade work out?
MAXR gained 125% on Friday following news that the stock would be taken over. And with the stock at 51, those calls bought for $1.55 on Thursday closed at $27, or a $12 million overnight profit.
I hope this “lucky” trader enjoys his Christmas, because it will be his/her last one spent outside of a jail cell for some time.
Events for the Week to Come
In theory, ahead of the Christmas holiday trading action should be slow this week, as traders head out for the holiday. Also, the only “major” economic data points that will be released this week are GDP on Thursday and Consumer Confidence on Friday.
And while the market may be slow, and some traders will be traveling, I am working the entire week, and will make moves for the portfolio if the right opportunities present themselves.
What Traders are Saying
If you want to get me worked up these days when discussing market signals, then bring up the much talked about put/call ratio … which is, in my opinion, one of the most flawed options-related signals. For example, here are a couple of tweets from last week shared by prominent financial analysts, implying that trouble could be ahead:
Liz Ann Sonders (Chief Investment Strategist, Charles Schwab): 30-day average of CBOE equity put/call ratio has moved to highest since April 2020 and, before that, December 2008.
@charliebilello: The ratio of equity puts (bearish bets) to calls (bullish bets) over the last 30 trading days has only been this high a few times in the past: April 2008 and Oct/Nov 2008.
However, what has been skewing the put/call data recently is large scale interest rate plays, via trading DEEP in-the-money puts, looking to make a couple pennies here or there. For example, below are a couple snapshots of trades from Friday (and this is a very small sample).
The first column on the left is the deep-in-the-money put strike price, and the next column is the quantities of the trades.
Net/net, and this is a SMALL snapshot of such trades, 23,000 PYPL and 60,000 Google puts were flipped back and forth at the exact same second. Had I taken clips of all of these deep put plays throughout the day the net total could be well over a million put contracts traded.
My point is these options flipping back and forth in order to make pennies via interest rate plays GROSSLY skews the put/call ratio, which leads me to firmly believe this much talked about option signal should be ignored.
Open Positions
Bank of America (BAC) Stock – BAC fell 2.25% last week, largely in-line with the market, and the December 37 call that we sold for $1.14 expired worthless on Friday.
That leaves us with our stock holding and the $0.22 dividend which will be paid later this month. I will be hunting for a new call to sell in the coming days.
Blackstone (BX) March 80 Puts – On Friday we closed half of our BX puts for a profit of 32.14%. While I think the stock looks terrible and the option activity has been overwhelmingly bearish, I stuck to the system and locked in a quick gain.
Biotech ETF (XBI) January 84 Call – Despite the market weakness, the XBI was able to gain 2% last week. That being said, time is absolutely becoming an issue for our calls as January is now the front month.
Alphabet (GOOGL) February 120 Calls – GOOGL lost 2.3% last week, largely trading in-line with the Nasdaq. Not much more to add as the stock remains stuck in a range between 90 and 100.
Cameco (CCJ) Stock – CCJ was unchanged last week, and the December 26 call that we sold for $0.69 expired worthless.
This week I will look to sell another call against our stock holding.
Las Vegas Sands (LVS) March 44 Call – Very impressively, LVS was unchanged last week despite the stock’s recent run-up and the market’s weakness. I like the look of LVS and our position a lot.
PayPal (PYPL) March 80 Call – I’m less enthusiastic about PYPL, which fell 5.5% last week along with growth plays. At some point this group will turn, but my patience, and our calls, may run out of time before that happens.
Pinterest (PINS) March 25 Call – PINS gained 7% last week, with most of those gains sparked by Wall Street firm Piper raising the stock’s rating to overweight based on an advertising buyer survey.
Also, as noted on Thursday there was a buyer of 45,000 Pinterest (PINS) March 25 Calls for $3.45 – Stock at 25.3 (rolled from December calls).
S&P 500 ETF (SPY) March 420 Puts – Last week’s market decline was the perfect example of why we continue to hold our bearish SPY March play, as our puts are in outstanding shape and are doing a great job protecting our portfolio.
Starbucks (SBUX) January 85 Calls – SBUX finally gave up some ground last week as the stock fell 3%. Of note, I set a mental stop on our position at 95 late last week.
Vale (VALE) June 17 Calls – VALE fell 5% last week, though continues to look rock solid. Much like most bullish positions in the portfolio, I think VALE could be a leader IF the market gets in gear.
