March 10, 2023
Bearish Positions Update – BX/SPY
Thankfully we’ve been somewhat hedged in our portfolio in recent days, with the bank stock meltdown of the past two days being a negative for our bullish positions … but also a win for our bearish positions, which has cushioned the blow.
One of those bearish positions is Blackstone (BX), which fell apart yesterday and really unwound this morning, trading as low as 79.5 before bouncing back to 83 (as of noon eastern). While our small put position is running out of time and may expire worthless in the coming days, I believe it’s best to continue holding in case the market really unravels.
Essentially, this put will protect us against a market crash for the next week. As Warren Buffett said in the past, and which may apply to SIVB and the rest of the banks “What you find is there’s never just one cockroach in the kitchen when you start looking around.” Not predicting that, but I’m open to anything.
Also, for better or worse, our SPY September 400 puts are now at a potential profit of approximately 45%. I am going to hold this bearish position as well, just in case the banking mess continues to hit the indexes.
Stepping back, we are holding more bullish positions than bearish ones, so we want the market to go higher. That being said, our BX and SPY put positions will certainly help the cause should the intense selling pressures continue.
It’s going to be interesting!
March 9, 2023
Sector on Watch – Financials
Today is a very interesting day for the market, as the Financials (XLF) are down 2.6%, while the Regional Banks (KRE) are lower by nearly 7%!! The “old school” trader in me hates to see this kind of weakness in the banks, as the sector is often seen as a leading indicator for the direction of the market.
Also of note, my option order flow list today is made up of nothing but bearish trades in financial stocks, including:
Bearish Order Flow:
Buyer of 6,000 Charles Schwab (SCHW) April 70 Puts for $1.83 – Stock at 73
Buyer of 7,000 Bank of New York (BK) April 50 Puts for $2.50 – Stock at 48.75
Buyer of 1,000 Zions Bancorp (ZION) April 42.5 and April 40 Puts – Stock at 43
Buyer of 20,000 Ally Financial (ALLY) April 27 Puts for $1 – Stock at 28.5 (rolled down from April 30 puts)
Buyer of 2,000 Blackstone (BX) May 90 Puts for $6.35 – Stock at 90
And while the list above is concerning, unfortunately, that is only a small sample of the bearish option activity.
With all that being said, interestingly, the S&P 500 is not yet falling apart, as many stocks outside of the financials are trading reasonably well. Also, while the VIX is trading higher, it is hardly screaming panic as it remains below 20.
Stepping back, maybe today’s action in the financials is just a one-off, and tomorrow these fears will be washed away following the Jobs Report, and then next week’s CPI release. However, I am watching this situation very closely, and should conditions continue to deteriorate, we will sell some of our bullish positions and add even more bearish exposure.
March 7, 2023
Fed Chairman Powell spoke publicly this morning, and there is little question that his tone was hawkish. Here are some of the highlights …
Powell: Economy’s strength suggests peak rate will be higher than previously anticipated.
Powell: If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.
Following this speech, the odds of a 50bps rate hike at the March meeting rose to above 60%. This is a monster move in those odds, as just a month ago the bond market was pricing in a 1% chance of a 50bps hike!
With this in mind, and having gone through last year’s market freakouts every time the Fed Chairman spoke hawkishly, one might expect the indexes would be down 2% or more today.
That assumption would be wrong.
As of 12:30 Eastern the S&P 500 is lower by 0.65%, and the Nasdaq is mostly unchanged. Also, the VIX, which was relatively low coming into this event, is also mostly unchanged.
The lack of panic, should it continue, in the equity market to this news is SUPER interesting. Let’s see how the day closes out … however if the indexes remain calm/resilient in the face of “bad news” we could be adding exposure to the portfolio soon.
March 6, 2023
What started out as another troubling week for the bulls turned encouraging as the indexes rebound nicely on Thursday and Friday. By week’s end the S&P 500 gained 1%, the Dow rose 1.1%, and the Nasdaq rebounded 2%.
Stocks on Watch
Outside of American Airlines (AAL), which we got exposure to via our Jets ETF (JETS) call buy last week, hedge funds and institutions continue to tread lightly in this market, and have not been buying several rounds of calls or puts in any one stock. In reality, this quiet action makes sense as the indexes have largely gone nowhere in the last month.
At some point the call/put buyers will come back, but I’m guessing they are waiting for a clearer picture on the path of interest rates before jumping back in with big premium positions.
That being said, as I noted on Friday, due to stock strength in the face of a so-so market, I am intrigued by Meta (META), Nvidia (NVDA) and salesforce (CRM).
Also, while the call buying below amounted to “one-off” call buys, both the Mexico ETF (EWW) and MGM Resorts (MGM) stock look great, and this call buying is interesting:
Wednesday - Buyer of 10,000 Mexico ETF (EWW) April 62 Calls for $0.85 – Stock at 59
Wednesday - Buyer of 15,000 MGM Resorts (MGM) March 47 Calls (exp. 3/31) for $0.64 – Stock at 44.
MGM, along with all casinos, looks great, though of note, until we sell our LVS position I am not going to get involved with MGM/CZR/WYNN.
Conversely, we have no exposure to the Mexico ETF, and quietly EWW broke out to a five-year high on Friday. Hmmm …
Despite recent weakness for the S&P 500 the Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 18.5. This lack of fear in the “fear index” should be encouraging for the bulls, as even a gain of 1% last week for the S&P 500 was enough to send the VIX to recent lows.
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 focus this week for traders will be the February Jobs Report on Friday. Last month’s number came in well above expectations, which along with subsequent hotter-than-expected inflation data sparked a massive move in the bond market in the last several weeks.
Also, Fed Chair Jerome Powell will speak publicly on Tuesday and Wednesday, which could trigger a market move.
And while the heart of earnings season has passed, traders will be watching for quarterly results this week from CrowdStrike (CRWD), Sea Limited (SE), Ulta Beauty (ULTA) and Oracle (ORCL).
What Traders are Saying
This week I wanted to dive a bit deeper into our recently purchased Jets ETF (JETS) call buy from last week …
As I noted in the trade alert, I had become interested in United Airlines (UAL) because of its stocks strength, and American Airlines (AAL) because of the unusual call buying the past several weeks, including these trades made AFTER our JETS purchase:
Wednesday - Buyer of 72,000 American Airlines (AAL) September 21 Calls for $0.49 – Stock at 15.8
Friday - Buyer of 35,000 American Airlines (AAL) April 17 Calls for $0.74 – Stock at 16.35.
So, the debate became, buy UAL or AAL, or get exposure to both via the JETS?
This was not an easy decision, as there are pros and cons to either strategy.
In terms of buying UAL/AAL, the cons would be the risk of bad news for either of the companies (think the outages Southwest (LUV) had earlier this year, or general company news). Also, the price of options is more expensive in individual stocks when compared to the ETF.
The upside to a call buy in UAL/AAL is these stocks would likely move faster to the upside than the ETF, could have positive news, and would not be held back by LUV/DAL or other components of the ETF.
In terms of the JETS, the positives for buying the ETF is that if UAL or AAL fell on company specific news, the rest of the components of the ETF (BA/BKNG) could potentially offset those losses, which essentially lowers the risk in the ETF falling.
Also, the options in the ETF are cheaper, though this comes at a “price” as there is no chance the ETF could be taken over or have a positive news catalyst, unlike UAL/AAL.
Stepping back, only time will tell if buying UAL/AAL would have been the right move, or if the JETS call buy was the better way to play the sector strength/unusual option activity. Regardless, I like the risk/reward in our trade should the market continue to bounce back in 2023.
Bank of America (BAC) April 36 Covered Call – BAC was mostly unchanged last week and largely looks “OK,” which is perfect for our covered call. Of note, we will collect the $0.22 dividend later this month, which drops our breakeven on this trade to 34.17.
Blackstone (BX) March 80 Puts – The market re-strengthening to close last week tells me it may be time to move on from our BX puts. While the news surrounding the company’s embattled real estate fund keeps getting worse, time is likely too much of an issue for our puts to truly explode in value.
Disney (DIS) September 105 Calls – DIS, much like the market, looked like garbage headed into Wednesday, and then showed signs of life on Thursday and Friday. Because our position doesn’t expire until September, I will give this trade more time.
Also of note, Citi put out a research report last week noting the company may sell its 67% stake in Hulu, which could potentially be a positive for the stock.
TechnipFMC (FTI) April 14 Covered Call – FTI rose marginally last week, closing $1.35 above our short strike. This trade is working very well.
Of note, on Tuesday a trader bought 6,000 TechnipFMC (FTI) April 17 Calls for $0.60 – Stock at 15.8.
Jets ETF (JETS) October 20 Call – See “What Traders are Saying” above.
Las Vegas Sands (LVS) March 44 Call – LVS continues to look spectacular, and our position is now at a potential profit of 228%.
Russell 2000 (IWM) August 185 Call – The IWM gained 1.25% last week, and still looks pretty good. Not much more to add.
S&P 500 ETF (SPY) September 400 Puts – For better, not worse, the market bounced last week, which was a positive for the portfolio, and a slight negative for our puts. Big picture, this trade continues to work well.
Vale (VALE) June 17 Call – Following positive economic data from China, VALE gained 6% last week. Commodity stocks like VALE can get red hot, real quick.
Of note, on Friday a trader bought 7,000 Vale (VALE) April 18 Calls for $0.45 – Stock at 17.25.