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Week of March 20, 2023

Now that was an interesting week, as countless sectors imploded (banks/REITs/airlines/energy) while at the same time money rushed into mega-cap technology. By week’s end the S&P 500 had risen 1.43%, the Dow had fallen 0.15%, and the Nasdaq way outperformed, having gained 4.41%.

March 21, 2023
Federal Reserve Preview

Wednesday afternoon the Federal Reserve will announce its stance on interest rates. As of Tuesday afternoon, the bond market is pricing in an 80% chance of a 25-basis point hike, and a 20% chance of keeping rates where they currently stand.

These odds, as well as the size of the moves, have gyrated violently in the last month. For example, for weeks it was expected there would be a 25-basis point hike … then very quickly the market priced in a 50-basis point hike … and now we are back at 25, with the possibility of no movement at all.

Regardless, let’s dive into what the options market is pricing in …

S&P 500 – 1.5% move tomorrow, and 2% for the rest of the week.

Nasdaq – 1.6% tomorrow, and 2.2% for the rest of the week.

I am a bit surprised with the somewhat low expectations for market movement this week, as the indexes have somewhat regularly made 1.5% moves on “normal” days in the last two weeks.

Of note, as the market has firmed up a bit following the banking scare of the last two weeks, I am debating rolling our IWM and/or our JETS/DIS calls down to strikes closer to the current stock price. These adjustments would give us better exposure to the market potentially moving higher.

However, if I were to do that, please note I am not going to put new capital to work in these trades, and instead would own fewer calls, at a lower strike price.

Though I’m not there yet on this decision.

Finally, I wanted to share a couple Wall Street notes on the Fed meeting tomorrow:

Nomura said it forecasts Jerome Powell and the Fed to CUT rates by 25 basis points and HALT QT March 22nd.

JPMORGAN: “The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return – a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).”

And finally, I thought the headline from the J.P. Morgan research note perfectly summed up the past two weeks of news:

Screen Shot 2023-03-21 at 2.09.24 PM.png

Tomorrow is going to be interesting!

March 20, 2023
Weekly Update

Now that was an interesting week, as countless sectors imploded (banks/REITs/airlines/energy) while at the same time money rushed into mega-cap technology. By week’s end the S&P 500 had risen 1.43%, the Dow had fallen 0.15%, and the Nasdaq way outperformed, having gained 4.41%.

Stocks on Watch

To say we are in a toss-up market is an understatement. This is what I mean …

Tech titans MSFT/NVDA/META/AMD look rock solid, and in some cases, spectacular. I am interested in getting involved in all.

However, good gracious the banks and REITs look AWFUL, and option activity continues to be wildly bearish in these stocks, including these trades from last week:

Buyer of 10,000 x 20,000 SL Green Realty (SLG) May 25/17.5 Bear Put Spread – Stock at 24
Buyer of 4,000 Starwood Property Trust (STWD) April 15 Puts for $0.70 – Stock at 16.5
Buyer of 1,000 Boston Properties (BXP) October 35 Puts for $2.70 – Stock at 50.5
Buyer of 2,000 Vornado (VNO) April 12.5 Puts for $1.10 – Stock at 14
Buyer of 4,000 Blackstone (BX) April 85/70 Bear Put Spread for $4.20 – Stock at 84
Buyer of 20,000 Ally Financial (ALLY) May 20 Puts for $2.21 – Stock at 22
Buyer of 3,000 Morgan Stanley (MS) July 92.5 Puts for $11.10 – Stock at 85
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 1,000 KKR (KKR) June 40 Puts for $1.15 – Stock at 51
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 8,000 Fifth Third Bancorp (FITB) April 20 Puts for $1.30 – Stock at 27.5
Buyer of 4,000 Affirm (AFRM) April 7.5 Puts for $0.50 – Stock at 10
Buyer of 2,000 Blackstone (BX) April 65 Puts for $1.65 – Stock at 83
Buyer of 7,000 Real Estate ETF (IYR) April 70 Puts for $0.47 – Stock at 83.5.

Unfortunately, this put buying is only a small sample of the bearish activity in the financials/REITs. And when the financial stocks look bad, and option activity is this bearish, I get worried.

Stepping back, as I wrote on Friday ahead of the Fed meeting on Wednesday, it makes sense to be ultra-defensive, and while not “sexy,” we need to patient with new buys.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 25.5. I would be shocked if the VIX falls much from these levels ahead of the “big” Federal Reserve event on Wednesday. However, following that announcement, if the market is stable, the VIX could potentially fall from these elevated levels to the 20 area (approximately).

Option Order Flow was fairly bearish this past week as my Options Barometer came in at:

Monday – 3
Tuesday – 3
Wednesday – 5
Thursday - 5
Friday – 3

Events for the Week to Come

The Federal Reserve announcement on Wednesday will undoubtedly be the headliner this week. Of note, as of Friday there is a 75% chance of a quarter-point interest rate hike, and a 25% chance of holding rates at current levels.

On the earnings front the following companies will report this week:

COT_Issue_03-20-23.png

What Traders are Saying

As we all likely know, the big news of the last two weeks is the collapse of SVB Financial (SIVB) and Signature Bank (SBNY). And while those stories will send ripples through the stock market and economy for weeks/months to come, a less reported story is what happens to put options that traders owned.

Let’s start here: SIVB and SBNY last traded at $106 and $70 last week. Since then both stocks have been halted. Now where this gets a bit trickier is last Friday, March 17 was options expiration.

According to Bloomberg, “There are about 7,660 put options on SVB Financial worth a notional $114 million due to expire Friday and another 22,347 worth $178 million on Signature, according to Bloomberg calculations based on the last trading session for each stock. Assuming the banks’ shares are now worthless, they all represent winning bets.”

The Options Clearing Corp. (OCC), which provides clearing and settlement services for derivatives, announced Tuesday that its usual process of automatically exercising options would not happen for contracts tied to Signature and SVB. That’s because when shares aren’t trading, there’s technically no way to value them and determine which options are in-the-money.

“An underlying security price will be shown, but members should not view this price as a reliable estimate of underlying security value, which is sufficient to determine exercise decisions,” the OCC said in a memo.

This means that options holders would have to instruct their brokers to exercise those puts for them. However …

Where this gets a touch tricky is if you are long the SIVB 90 put, which in theory is a MONSTER winner, you could exercise your put which gives you the right to short the stock at 90, HOWEVER, you can’t buy back that stock at $1 (example) to lock in your profit as the stock is halted.

Interesting situation …

Open Positions

Bank of America (BAC) April 36 Covered Call – BAC, along with its peers, continues to look awful. Now the question becomes: Do we give the stock more time to recover and roll our short calls down to a strike with more premium, or exit the position entirely, and move this capital into fresher ideas? Hmmm.

Disney (DIS) September 105 Calls – DIS was mostly unchanged last week. Not much more to add, other than these company-related headlines from The Wall Street Journal:

Disney+ Users Digested the Streaming Service’s Recent Price Increase, Antenna Data Show

About 94% of Disney+ Users Stayed with the Product at Higher Price, Data Show

TechnipFMC (FTI) April 14 Covered Call – FTI fell 15% last week as oil stocks got nailed. Much like our BAC covered call, the debate is to roll down to a new strike price to sell, or simply exit the position. For now, my lean is to wait this trade out as we received a big premium when we sold the April 14 call.

Jets ETF (JETS) October 20 Call – Last week, into the heart of the market sell-off we sold a third of our JETS position. While I don’t love taking losses, it happens, especially when the market unwinds so quickly.

Now we will patiently see how the market and the JETS ETF trade in the week to come.

Russell 2000 (IWM) August 185 Call – The IWM got nailed last week as the regional banks have heavy exposure in the ETF. Also not helping the cause is traders are now pricing in a potential recession, which is not great for the IWM either.

Much like BAC/FTI above, the question now becomes do we sell and move on, or roll our long calls to a strike price that will move much quicker should the market get back in gear?

S&P 500 ETF (SPY) September 400 Puts – For better or worse, our SPY puts are working well, and we will continue to hold this bearish position against our bullish holdings.

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.