November 23, 2022
Scheduling Note, and Stocks on Watch – Apple (AAPL)
Before I dive into a Stocks on Watch, I wanted to note that the Cabot offices will be closed Thursday and Friday of this week. What this means is you will receive the Option Order Flow email tomorrow morning, and then we will hop back into action on Monday morning. Have a great Thanksgiving!
Moving on …
As I wrote on Monday morning in the Weekly Update, I am debating buying Apple (AAPL) puts, as option trading in the stock was bearish last week, and continues to be so this week, including these trades:
Today - Buyer of 25,000 March 155 Puts for $11.91 – Stock at 151
Monday – Buyer of 40,000 June 130 Puts for $7 – Stock at 148
11/18 – Buyer of 20,000 June 135 Puts for $8.08 – Stock at 151
11/14 – Buyer of 25,000 May 130 Puts for $6.60 – Stock at 148
11/11 – Buyer of 15,000 May 135 Puts for $9.20 – Stock at 145
This kind of large scale, big premium put buying, day after day, is everything I look for in unusual option activity, and I am heavily debating buying AAPL puts expiring in mid-2023, and throwing them in my back pocket.
That being said, the market is showing some signs of life in the last two weeks, and because of that I’m not in a rush to add bearish exposure.
And while I’m becoming more encouraged by the market rally, should this put buying continue, I will not hesitate adding AAPL puts to the portfolio.
November 21, 2022
The three leading indexes were slightly lower last week as the S&P 500 fell 0.61%, the Dow declined by 0.5%, and the Nasdaq lost 1%. This week, in theory, the market should be somewhat quiet ahead of Thanksgiving, and on that note, the Cabot office will be closed Thursday and Friday of this week. Have a great Thanksgiving!
Stocks on Watch
Ahead of the long holiday weekend I am unlikely to add even more long premium positions to the portfolio. That being said, I am watching the trades below:
Taiwan Semiconductor (TSM) gained 10.5% last Tuesday on news that Warren Buffett’s Berkshire Hathaway had bought a $4.1 billion stake in the company. Into that strong stock reaction a trader bought the following positions, looking for TSM to continue to run higher in the months to come:
Tuesday - Buyer of 10,000 Taiwan Semiconductor (TSM) January 60 Calls for $23.35 – Stock at 82.3
Tuesday - Buyer of 3,000 Taiwan Semiconductor (TSM) December 80 Calls for $4.65 – Stock at 81.5.
TSM is a leading semiconductor play, and should the semis continue to strengthen, having a buyer like Warren Buffett in the company certainly doesn’t hurt the cause for the stock.
On the bearish side of the coin, if I wanted to be glass half empty, the put buying activity in Apple (AAPL) has been steady, and a fall in leading financial player Blackstone (BX) could signal trouble in the system. Here are those trades:
Friday – Buyer of 20,000 Apple (AAPL) June 135 Puts for $8.08 – Stock at 151
Wednesday – Buyer of 3,500 Apple (AAPL) May 130 Puts for $6.55 – Stock at 148
Monday – Buyer of 25,000 Apple (AAPL) May 130 Puts for $6.60 – Stock at 148
11/11 – Buyer of 15,000 Apple (AAPL) May 135 Puts for $9.20 – Stock at 145
Tuesday – Buyer of 11,000 Blackstone (BX) February 85/75 Bear Put Spread for $2 – Stock at 100.
I’m “flirting” with the idea of buying puts in AAPL, as the option activity has been overwhelmingly bearish. That being said, for now the stock, and the market, seem like they are in “OK” shape, and I may hold off … maybe.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 23. I would expect the VIX to bleed lower this week ahead of the long holiday weekend, as explained in much greater detail in the “What Traders are Saying” section below.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 6
Wednesday – 5
Thursday - 5
Friday – 5
Events for the Week to Come
This week should be relatively quiet ahead of Thanksgiving … though if 2022 stays on brand, there of course will be wild market swings.
Economic data releases this week will be very light, and below is the relatively small list of companies reporting earnings this week:
What Traders are Saying
Twice last week I referenced the volatility crush that was coming to the options market this week. Following those notes, I received a couple emails from subscribers asking for a greater explanation. This is what I mean …
All options are a wasting asset whose time value erodes to zero by expiration. This erosion is known as time decay. Every day of an option’s “life” it loses value as the time it has to finish in-the-money passes.
That said, let’s turn our attention to the calendar. The stock market will be closed this Thursday in celebration of Thanksgiving, and will close early on Friday. This means, unless something dramatic happens in the world, the stock market will for all purposes be closed for four days (Thursday/Friday/Saturday/Sunday, and Wednesday will probably be quiet as well). So what does this mean for options?
Over the course of the next couple of days, the market makers, or more likely their computer systems, are going to “push the date ahead” in all their products.
As we get closer to Wednesday the computer models will move the date to Monday, November 28, which is the day the market opens after the holiday. The models do this to price in the decay of the days off for the holiday. That means that they will take virtually all of the decay out of the options ahead of time, so that they aren’t stuck being the buyer of decaying assets over a long weekend.
So how do we profit from this phenomenon? By selling options or option spreads, which is exactly what we did by selling CCJ and BAC options last week.
When we sell options, we are trying to capture the option decay as we are short a decaying asset.
That being said, if the computer models push the date ahead too far ahead on Wednesday, I may take advantage of the cheap option prices and be a buyer, but only if the opportunity is too good to pass up.
Bank of America (BAC) December 37 Covered Call – On Thursday, ahead of the volatility crush that will set in this week, we added this new short vol. position in BAC, which is a financial leader and whose stock looks solid.
Biotech ETF (XBI) January 84 Call – The XBI fell 4.4%, and time is becoming an issue for our calls. I’m flirting with exiting this trade … though in fairness, every time I worry about the XBI, it comes roaring back to life.
Alphabet (GOOGL) February 120 Calls – GOOGL gained 1%, and was mostly quiet last week. Not much more to add.
Macy’s (M) November 20 Call (exp. 11/18) – On Friday M stock closed above our short 20 strike price, and we walked away with a profit of 8%. This position is now closed.
Cameco (CCJ) December 26 Covered Call – On Wednesday we rolled from a November covered call to the December 26 covered call, which lowered our cost basis on our position to 24.81. Also of note, on Monday a trader bought 10,000 Cameco (CCJ) March 32 Calls for $0.88 – Stock at 24 (rolled from January calls).
Las Vegas Sands (LVS) March 44 Call – LVS gained 1% last week, largely moving in-line with China-related stocks. Of note, on Thursday a trader bought the following position, looking for a big move higher this week:
Buyer of 5,000 Las Vegas Sands (LVS) November 45.5/47 Bull Call Spread (exp. 11/25) for $0.30 – Stock at 44.
Occidental Petroleum (OXY) December 65 Call – OXY fell 4% last week as oil came under pressure. That being said, on Friday, as oil made a new recent low, OXY was mostly unchanged, which was encouraging.
PayPal (PYPL) March 80 Call – After a strong start to last week, which saw the stock trade above 90, PYPL bled lower to close the week. The stock continues to trade with the daily “risk-on/risk-off” narratives.
Pinterest (PINS) March 25 Call – PINS finished the week higher by 1%, and looks good. Though of course if the market is not in the mood for growth stocks, this could change my opinion on PINS stock. Of note, on Friday a trader bought 4,000 Pinterest (PINS) December 25.5 Calls (exp. 12/9) for $0.90 – Stock at 24.35.
S&P 500 ETF (SPY) March 420 Puts – For now, I will continue to hold our hedge, just in case the market once again falls apart.
Starbucks (SBUX) January 85 Calls – SBUX rose marginally on the week, and continues to look like a star. Our trade is in great shape.