February 16, 2023
Vale (VALE) Earnings
Vale (VALE) will report earnings today after the close. Headed into the announcement we are holding two-thirds of a position, having taken profits of 24.15% on the first third.
I am going to continue to hold my position through the announcement as I would not expect, though this is not a guarantee, the stock to move dramatically today/tomorrow … essentially commodity-related stocks like VALE typically move more with the price of those commodities instead of earnings announcements.
That being said, I could be wrong, and it’s possible VALE will fall dramatically. Because of that risk, if you want to lower your exposure, or exit the trade entirely, you must do so by the close of trading today.
VALE - With the stock trading at 17, the options market is pricing in a move of $0.50 this week, or 16.50 to the downside and 17.5 to the upside.
Open interest is skewed bullish on a ratio of 1.3:1 call vs. put.
Skew is pricing in typical downside risk, as well as upside interest.
February 13, 2023
Weekly Update
For the first time in the new year, the market had a bad week. The declines aren’t terribly surprising or worrisome (for now), as the recent rally had been without much of a pause.
For the week, the S&P lost 1.05%, the Dow was mostly unchanged, and the Nasdaq finally gave back some gains, falling 2.11%.
Stocks on Watch
As I note in the “Volatility” section below, option activity has not been overly bullish in the last two weeks. In fact, outside of a handful of earnings season winners (MS/XOM/UBER/AXP/HOG), my watch list is largely led by put buying activity. For example …
It doesn’t take years of options trading experience to note a trend in put buying in housing-related plays, which I spotted last Wednesday. Here are those trades:
Buyer of 4,000 Housing ETF (XHB) March 69 Puts for $2.05 – Stock at 70
Buyer of 3,000 KB Home (KBH) May 40 Puts for $3.50 – Stock at 39
Buyer of 17,000 KB Home (KBH) March 37 Puts for $1.04 – Stock at 39.
Perhaps this is a play on interest rates rising even further than expected and housing taking a new leg lower. I have my eye on this situation.
Next up is the non-stop put buying in Carnival Cruise (CCL) from last week. Here are those trades:
Friday - Buyer of 4,000 Carnival (CCL) January 10 Puts for $1.68 – Stock at 11.25
Thursday - Buyer of 4,000 Carnival (CCL) July 11 Puts for $1.47 – Stock at 11.5
Wednesday - Buyer of 5,500 Carnival (CCL) July 11 Puts for $1.28 – Stock at 12
Monday - Buyer of 40,000 Carnival Cruise (CCL) September 10 Puts for $1.18 – Stock at 11.7.
While I don’t love buying puts on an 11-dollar stock as the downside is limited, there is no question that traders are adding bearish exposure to CCL, and I’m intrigued.
And finally, somewhat quietly Transocean (RIG), which was an oil star before cratering, is coming back to life once again as the stock has rallied 65% year-to-date. Into this rally traders have steadily bought calls including the trades below from Wednesday:
Buyer of 5,500 Transocean (RIG) March 8 Calls for $0.47 – Stock at 7.5
Buyer of 4,000 Transocean (RIG) May 8 Calls for $0.91 – Stock at 7.5.
I’m intrigued by RIG as well as its peers such as DO/SDRL/NE as this group has surged higher to start the year.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 20.55, or higher by 12%.
Of note, and this is super short term in nature, I wanted to highlight that despite the market rallying the past several weeks, large hedge fund/institutional option activity has not been a buyer of this rally. This is part of the reason we have not been adding a bunch of bullish exposure, and in fact have been taking partial profits and added puts last week.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 5
Events for the Week to Come
The big event this week will be the release of the Consumer Price Index (CPI) on Tuesday. Should this number come in hotter than expected following a surprisingly strong Jobs Report two weeks ago, the odds of further aggressive rate hikes this year will continue to rise.
On the earnings front, the following companies will report this week:
What Traders are Saying
In my 10 years of managing the Cabot Options Trader/Pro portfolios, there is no trade alert that I send that gets as many questions as put buying/hedges. It’s not even close! This was the case again last week when we rolled out of our SPY March puts and into September puts.
Because of the volume of questions, I wanted to dive into some of my thoughts on this position.
First off, I am not bearish on the market. I think the S&P 500 is going higher this year.
However, I am not so confident in that outcome that I won’t add bearish exposure if the price is right.
Speaking of price, with the VIX trading at 19, options had become more reasonably priced, and because of that, getting bearish exposure to the market for nine months felt like a no-brainer.
Part of the reason this put buy was a no-brainer is if I want to add bullish exposure to the portfolio, these SPY puts would protect our stocks if my new buys turned out to be poorly timed.
The most frequent question I get when buying puts/hedging is how big of a position would I recommend COT members buy?
That is not an easy question.
Personally, when I make a trade recommendation, unless I specifically say “buy half” I am always buying a full position. That means if I’m buying $10,000 worth of calls when I make a call recommendation, I also buy $10,000 worth of puts (these values are simply examples).
That being said, it is up to you how much bearish exposure you may want.
If you are bullish on the market, don’t buy any puts, or half of a position of puts, etc.
If you are uber bearish, buy a full position, or even more if you want to hedge your stock portfolio outside of Cabot Options.
Finally, I wanted to address why we rolled last week …
The March puts that we owned only have 35 days until expiration. That means that option decay is going to ramp up in the coming days/weeks. In fact, those March 420 puts were losing $0.14 a day of decay … and that loss of value was only going to ramp up in the coming weeks.
Conversely, the September puts that we bought are only decaying at a rate of $0.05 a day, which is much more manageable.
One more item …
I chose to buy the 400 puts rather than the 410 puts, which is where the SPY was trading at the time of the purchase, as I am not overly bearish on the market.
I hope this helps explain my thought process on this trade. As always if you ever have any questions, don’t hesitate to email me at jacob@cabotwealth.com.
Open Positions
Bank of America (BAC) February 36 Covered Call – Ahead of expiration this Friday, BAC closed last week $0.40 below our short strike price. Where the stock is trading as we get closer to the end of the week will determine how we manage this position. Regardless, this trade is working well.
Blackstone (BX) March 80 Puts – BX fell 4% last week, and put buying once again picked up steam, including this trade from Thursday: Buyer of 3,000 Blackstone (BX) March 85 Puts for $2.05 – Stock at 92.
Disney (DIS) September 105 Calls – Hmmm … Disney initially soared higher following the release of the company’s earnings, and then bled lower Thursday and Friday. This is not what I wanted to see. I am going to try to be patient with our calls, but if the stock keeps falling, I will sell and move on.
Alphabet (GOOGL) February 120 Calls – As expected, the second half of our GOOGL calls will almost surely expire worthless this Friday.
Las Vegas Sands (LVS) March 44 Call – LVS fell marginally last week, largely in-line with the market. Big picture, our position is in outstanding shape.
PayPal (PYPL) March 80 Call – PYPL gained 3% following earnings on Friday. And while the stock trading higher is a positive, I would be hard pressed to believe that PYPL is going to soar higher in the next month. We may move on from the final piece of this position soon.
Russell 2000 (IWM) August 185 Call – The IWM had a pretty bad week, as the small-cap index fell 3.4%. There is no doubt last week was a “risk-off” week.
S&P 500 ETF (SPY) September 400 Puts – See “What Traders are Saying” above for a deep dive into our SPY put purchase.
Vale (VALE) June 17 Call – Ahead of earnings Thursday VALE stock received its second downgrade in as many weeks. My patience is becoming tested with this position … though with commodities, the narrative and price action can change very fast.
