October 9, 2023
Weekly Update
Last week the stock market once again had some wild ups and downs, led mostly by volatile moves in the bond market. And while the start of the week was ugly, the action Friday was impressive – though the situation in the Middle East may throw those good vibes from Friday right out the window. By week’s end the S&P 500 had gained 0.5%, the Dow had fallen 0.3%, and the Nasdaq had risen by 1.6%.
Stocks on Watch
As I wrote on Friday afternoon, because of impressive stock strength Nutanix (NTNX) is my lead candidate for a new buy. However, I am also intrigued by these two stocks following call buying activity and stock strength as well…
Chinese stocks have been dreadful for a year now. However, despite the sector weakness, Pinduoduo (PDD) is higher by 30% year-to-date, hardly flinched during the recent market weakness, and last week attracted several rounds of call buying. Here are those trades:
Tuesday - Buyer of 3,000 Pinduoduo (PDD) March 115 Calls for $7.50 – Stock at 97.5
Friday - Buyer of 1,800 Pinduoduo (PDD) November 105 Calls for $4.42 – Stock at 100.75
Friday - Buyer of 2,000 Pinduoduo (PDD) November 110 Calls (exp.11/10) for $4.20 – Stock at 106.5.
There is no question that PDD is the best-looking Chinese tech stock as the China Internet ETF (KWEB) is lower by 13% on the year, and former leaders from that group such as BABA, JD and BIDU are trading near their recent lows, yet PDD is near is at a 52-week high. VERY interesting!
Next up in terms of recent option activity is Antero Resources (AR), which is a Natural Gas play. What makes this stock interesting is the Natural Gas ETF (UNG) gained 16% last week and traders bought AR calls looking for the stock to rally hard as well. Here is that trade:
Friday – Buyer of 8,000 Antero Resources (AR) November 29 Calls for $0.46 – Stock at 25.
Natural Gas, much like Oil and Uranium and all commodities, can get RED HOT and ICE COLD very quickly, so a buy of AR calls would not be easy. That being said, getting involved with AR or EQT (another natural gas stock) is intriguing.
And finally, I did want to note the consistent put buying in American Airlines (AAL) which has been steady for weeks and continued again last week. Here are some of those trades:
Buyer of 5,600 American Airlines (AAL) January 12 Puts (exp. 2025) for $1.93 – Stock at 12.4
Buyer of 10,000 American Airlines (AAL) January 10 Puts (exp. 2025) for $1.23 – Stock at 12.4.
The put buying above is looking for bad things to come for AAL in the years to come.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 17.45, having traded just short of 21 earlier in the week while the market was under pressure.
Interestingly, last week when the market was weak, option activity was mixed, which was somewhat encouraging as it could have been overwhelmingly bearish. So that was a positive.
However, to be fair, on Friday when the market was strong, option activity was bullish, but much like earlier in the week when the market was soft, it was not overwhelmingly bullish. Because of that, it’s hard to get super bullish until the big players start aggressively buying calls.
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 – 6
Events for the Week to Come
The situation in the Middle East will garner much of the attention of traders this week, though inflation data via the Producer Price Index (PPI) on Wednesday and Consumer Price Index (CPI) on Thursday will also be of interest.
On the earnings front, this week kicks off reporting season with the financials leading the way Friday as JPMorgan, Citigroup and Wells Fargo will announce their quarterly results.
What Traders are Saying
Owning a “hedged” portfolio is always kind of interesting as you are rooting for your bullish positions to run higher, while your bearish positions will fall. Yet in reality, because most stocks move with the overall market, it’s unlikely that this perfect scenario will play out.
For example, last week the XLF, which we are short, fell to a recent low. That is good. Similarly, the QQQ, which we are also short, approached its recent lows.
However, there is almost no chance that the Financials and Nasdaq falling to their recent lows is going to be good for our bullish INTC, UBER, and DKNG positions.
So, it becomes a weird mind game when cheering the financials to fall, yet at the same time that almost certainly means the balance of the portfolio is taking pain.
Finally, I wanted to revisit the seasonality chart from last week. I updated that chart, now with a long blue arrow below, to show that we are now approaching what is historically the worst time of year for stocks, right before the indexes tend to move higher.
Open Positions
Cameco (CCJ) March 40 Calls – CCJ fell 5% last week along with its commodity peers, though the Uranium play did rally nicely on Thursday and Friday.
Cleveland-Cliffs (CLF) October 15.5 Covered Call – CLF finished the week at 15.5, which is the perfect spot for our covered call.
DraftKings (DKNG) January 25 Call – DKNG gained 1% last week and continues to “hold the line” of sorts despite the market’s weakness.
Freshworks (FRSH) October 22.5 Covered Call – FRSH fell 2% and looks “meh.” Of note, the October 22.5 call that we sold for $1.37 is now worth $0.05.
Intel (INTC) January 34 Call – INTC gained 2% last week and there continue to be surges of call buying activity, which is encouraging.
Li Auto (LI) June 40 Call – LI fell 1.8%, in line with its China stock peers. Of note, the call buying in LI continues, including this buy from Friday:
Buyer of 4,000 Li Auto (LI) June 25 Calls for $13 – Stock at 35.
Nasdaq ETF (QQQ) December 370 Puts – After a rough start to the week, the QQQs surged higher on Friday, but are now down 0.75% this morning. Regardless of this choppiness, we will continue to hold our hedge.
TJX (TJX) April 92.5 Calls – TJX finished the week mostly unchanged, which was pretty impressive given the recent weakness in retail stocks.
UBER (UBER) December 40 Calls – UBER fell marginally last week, though much like DKNG, the stock continues to hold up despite the market’s weakness.
Financials ETF (XLF) March 33 Put – On Tuesday we locked in a gain of 19.7% on a third of our XLF puts ahead of the start of earnings season for the Financials, which kicks off on Friday.
Energy ETF (XLE) January 85 Calls – The XLE fell 5% last week, but is bid higher by 3% this morning as oil is surging higher following the situation in the Middle East.
