October 16, 2023
Weekly Update
Not surprisingly this past week had many ups and downs, as the market responded well to bad news early in the week and then gave up some of those gains on Friday. By week’s end the S&P 500 had gained 0.46%, the Dow had risen by 0.79% and the Nasdaq had fallen marginally.
Stocks on Watch
In terms of stocks on my radar for new buys, I don’t have much on that list, which is fine as earnings season will almost surely produce new earnings winners. That being said, here are two stocks that I find distantly interesting due to option activity recently:
Sea (SE) was a post-Covid stock star that traded as high as 370 in November 2021, but since then the stock has been a disaster, having fallen as low as 36 in September. However, in the last three weeks the stock has perked up a touch, and option activity has been steadily bullish including this trade from Friday:
Buyer of 4,000 Sea (SE) December 65 Calls for $1.05 – Stock at 46.5.
I am not a fan of buying calls that are $20 out-of-the-money with just two months until their expiration. However, as I noted above, SE has seen steadily bullish call activity, so the stock is on my radar.
And finally, for those not in the know, the “miracle drug” GLP-1 which could be a solution to obesity and other health concerns has sent shockwaves through the investing world. For example, Consumer Staples stocks which are tied to snacks/food/sodas have been hit hard, Restaurants have been under pressure, and Med-tech stocks have been obliterated. It’s been UGLY for stocks in these sectors as it is assumed they will be hurt by GLP-1.
One of the Med-tech stocks that was hit hard last week was Baxter (BAX), which lost 13% last week and is down 17% in the last month. However, into that big stock decline a trader opened a huge bull risk reversal on Thursday, and then saw further call buying on Friday. Here are those trades:
Thursday - Buyer of 50,000 Baxter (BAX) November 35 Calls and Sale of 70,000 November 32.5 Puts – Stock at 32.5 (bull risk/reversal)
Friday - Buyer of 4,000 Baxter (BAX) November 32.5 Calls for $1.44 – Stock at 32.
The bull risk reversal is a very aggressive way to get bullish exposure to BAX as the trader is willing to buy 7 million shares at current levels via the put sale, and at the same time he/she has an “extra” 50,000 upside calls. And the call buy on Friday is yet another bullish trade.
I am not yet ready to get involved with a bullish position in any of the Consumer Staples, Restaurants or Med-tech stocks … though at some point if the selling becomes particularly nasty, I might be willing to take a longer-term speculative shot.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 19.32, having traded as high as 21 on Friday afternoon.
The VIX was moving violently on Friday (mostly to the upside) for the first time in months, which is somewhat concerning. Though on the other hand, potentially a more positive sign is put buying in individual stocks was somewhat quiet on Friday given a VIX spike of nearly 20%.
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
If last Friday was the first inning of earnings season, this week is the second or third inning as more and more of the market’s leaders will be reporting, including Bank of America (BAC) and Goldman Sachs (GS) on Tuesday, Tesla (TSLA) and Netflix (NFLX) on Wednesday, and Taiwan Semiconductor (TSM) on Thursday.
Open Positions
Cameco (CCJ) March 40 Calls – CCJ stock looks “bleh,” though option activity remains strong including these trades from Thursday and Friday:
Thursday - Buyer of 8,000 Cameco (CCJ) November 39 Calls for $1.06 – Stock at 36
Friday - Buyer of 8,000 Cameco (CCJ) November 39 Calls for $1.13 – Stock at 36.2
Friday - Buyer of 1,000 Cameco (CCJ) December 41 Calls for $1 – Stock at 36.
Cleveland-Cliffs (CLF) October 15.5 Covered Call – Ahead of expiration this Friday CLF finished the week at 15.05, which is below our short strike price. We will continue to wait this position out the next couple of days and then, depending on where the stock is trading on Thursday/Friday, we will likely once again roll this very successful covered call.
DraftKings (DKNG) January 25 Call – DKNG looked solid Monday through Wednesday of last week, and then gave up those gains on Thursday/Friday. Classic 2023 action (sigh).
Freshworks (FRSH) October 22.5 Covered Call – Ahead of expiration this Friday FRSH finished last week at 18, which is well below our short strike price. We will wait until later this week to decide how we will manage this covered call trade that is not working the way I had hoped.
Intel (INTC) January 34 Call – INTC continues to mostly chop around with the market, which is OK. Essentially, should the market get in gear, I think INTC will work, but if the indexes fall, so will INTC.
Li Auto (LI) June 40 Call – The option activity remains wildly bullish in LI, but the stock is stuck in the mud. If we didn’t have so much time until expiration, I would definitely have taken a loss on a piece of this position.
Nasdaq ETF (QQQ) December 370 Puts – A war in the Middle East, and continued weakness in the market, are just two of the reasons why we will continue to hold our market hedge against a bullish portfolio.
Nutanix (NTNX) April 37.5 Calls – On Tuesday we added NTNX to the portfolio following weeks of stock outperformance, and then the next day we locked in a profit of approximately 24% on a third of our position. This stock looks great.
TJX (TJX) April 92.5 Calls – TJX was mostly unchanged again last week. Not much more to add as the stock looks pretty good despite the market’s wobbles.
UBER (UBER) December 40 Calls – Much like DKNG, UBER looked to be back in gear on Wednesday, and then the stock gave up those gains and then some on Friday. If we didn’t already have profits in the bank on two-thirds of our trade, I would likely have sold on Friday.
Financials ETF (XLF) March 33 Put – The XLF responded fairly well to the start of earnings season for the financials on Friday. That being said, I continue to think the recent weakness in the financials is not going to be told during earnings season, as there are potentially bigger issues.
Energy ETF (XLE) January 85 Calls – The XLE is once again above 90, and our trade is in good shape as oil has been rising amidst war in the Middle East.
