September 22, 2023
LI Trade Follow-up
Yesterday afternoon we bought Li Auto (LI) June 40 calls following weeks of bullish option activity. This trade is off to a pretty good start as Bloomberg reported this morning that China has mulled easing foreign stake limits in the country’s publicly traded companies in an attempt to lure global funds back to its stock market.
In reaction to this news, LI stock is trading higher by 4.5% today at 40, and our calls are at a potential profit of approximately 13%.
Stepping back, who knows if China will, in fact, loosen foreign stake limits, or if this is even the catalyst the call buyers have been looking for.
Regardless, should the market strengthen again, and China stocks get out of the gutter, I really like the risk/reward in this trade … though given the carnage in the U.S. and China markets recently, we have a ways to go before declaring victories.
September 20, 2023
Fed Preview – Options Education Straddles
This afternoon the Federal Reserve will announce its stance on interest rates. Headed into the event the bond market is pricing in a 1% chance that the Fed will again raise rates today (basically no chance).
Not surprisingly given the assumed lack of policy change by the central bank, the options market is pricing in an expected range for the S&P 500 today of less than half a percent. This is the lowest expected move on a Fed day since November 2021.
I am not going to get involved with playing the Fed announcement.
However, if you have some gamble in you and want to bet against the lack of an expected market move, and also want to play with weekly options (which I don’t endorse), I would say the S&P 500 ETF (SPY) September 443 straddle expiring this Friday for $4.50 is somewhat reasonably priced.
For some refresh, when a trader buys a straddle, he/she is buying an at-the-money call AND an at-the-money put looking for the market or the stock to make a big move. In this case the trade might by buying the September 443 call and buying the September 443 put.
If the market moves explosively higher (more than the $4.50 expected range for the week), the call that was purchased would gain in value more than the put would lose in value. If the market moves explosively lower, the put would gain in value more than the call would lose in value.
The worst-case scenario when one buys a straddle is the market doesn’t move, and the options decay away to nothing … and in this case the most one can lose on a buy of the straddle for $4.50 is that $450 of premium purchased.
Here is the approximate profit and loss chart of a buy of the 443 straddle for $4.50:
Again, I’m not buying this straddle as I don’t love buying weekly options … in fact, I hate it. That being said, I did want to share with you this strategy for educational purposes.
September 18, 2023
Weekly Update
It was a fairly quiet week in terms of the leading indexes’ performance as the S&P 500 fell marginally, the Dow mostly finished the week unchanged, and the Nasdaq fell by 0.4%.
This week brings a Federal Reserve announcement that could potentially spark a more exciting week of market volatility.
Stocks on Watch
Late last week I wrote about my interest in Li Auto (LI) after several days of call buying. Yet soon after that Stocks on Watch I decided to buy Cameco (CCJ) instead. Today, I thought I would let you in on my thinking as to why I bought one stock and have not yet bought the other…
Essentially, the option activity in CCJ and its uranium stock peers became so overwhelmingly strong that I felt I had to act quickly on CCJ, and could wait on LI. Here were those CCJ/Uranium options trades late last week:
Buyer of 20,000 Cameco (CCJ) October 42 Calls for $0.69 – Stock at 39 (uranium play)
Buyer of 11,000 NexGen Energy (NXE) February 8 Calls for $0.35 – Stock at 6 (uranium play)
Buyer of 3,500 Uranium ETF (URA) April 30 Calls for $1.50 – Stock at 25.5 (uranium play)
Buyer of 7,500 Uranium ETF (URA) October 27 Calls for $0.90 – Stock at 26.25 (rolled up from October 26 calls)
Buyer of 8,000 Uranium Miners ETF (URNM) January 50 Calls for $1.85 – Stock at 43.5
Buyer of 8,000 Cameco (CCJ) October 42 Calls for $1.10 – Stock at 40.25.
The decision to buy CCJ first was well timed as we quickly locked in a profit of just over 30% on our calls overnight. And while it feels like this sale might be a mistake as option activity is insanely strong, in this market where the winds of momentum change quickly, we have to stick to the system.
In terms of LI, the stock is definitely next on my radar as option activity remained strong even after my original write-up. Here are the bullish trades made last week:
Friday - Buyer of 2,000 Li Auto (LI) June 32 Calls (exp. 2024) for $13.25 – Stock at 40.65
Wednesday - Buyer of 1,000 Li Auto (LI) January 40 Calls (exp. 2025) for $12.25 – Stock at 40.5
Tuesday - Buyer of 2,000 Li Auto (LI) June 35 Calls for $11.60 – Stock at 40.75
Monday - Buyer of 3,000 Li Auto (LI) June 35 Calls for $10.70 – Stock at 39.5
Buyer of 1,000 Li Auto (LI) January 40 Calls (exp. 2025) for $11.30 – Stock at 39.5.
I like this string of call buying quite a bit. Though of note, these trades are targeting a move higher next year, so I don’t yet feel like I need to race into a position.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week mostly unchanged at 14, having made a new 52-week low on Thursday. This lack of fear in the VIX Is encouraging even as it feels like the market is possibly weakening under the surface. Definitely mixed signals.
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 big event for the week is the Federal Reserve announcement on interest rates on Wednesday afternoon. And while the market is pricing in a near zero percent chance of a rate hike at this meeting, of greater importance is the Fed Chairman’s post-announcement press conference.
On the earnings front the following companies will report this week … it’s going to be a quiet week for earnings:
What Traders are Saying
I’ve written in the past about the surge of activity in weekly call/put buying activity, and more recently the ridiculous volumes of trades targeting a move higher or lower in the next day, a trade which is referred to in the industry as 0DTE (zero days until expiration).
As the chart below shows, this short-term option activity continues to ramp up:
According to The Wall Street Journal, we can see this momentum in short-dated option activity in social media circles as there have been tens of thousands of mentions of the hashtag #0DTE across Twitter, YouTube and Instagram, and a litany of online communities on Reddit, according to analytics company Hootsuite. A few years ago, there were hardly any such mentions.
As you all likely know, I think these short-term options trades are a terrific way to blow up your trading account as these traders will fail countless times, and their trades will very rarely work.
That being said, I’m not 100% against having some fun from time to time via 0DTE trades as long as you keep the capital at risk on the lighter side and know that you are essentially gambling/having fun.
Open Positions
Cameco (CCJ) March 40 Calls – As noted above, on Thursday we bought the CCJ March 40 calls following several days of bullish option activity, and then quickly locked in a profit of 30.33% on a third of our trade.
I like this trade quite a bit, though CCJ is going to move with the price of uranium, so this trade is going to be volatile.
Cleveland-Cliffs (CLF) – The September 16 call that we sold for $0.37 expired worthless on Friday leaving us with a CLF stock position “uncovered.” I will be looking to sell a new call, but won’t force it until the price is right to sell.
DraftKings (DKNG) January 25 Call – DKNG stock fell marginally last week, though continues to look solid. Of note, on Thursday a trader bought 6,000 October 33 Calls for $1.09 – Stock at 31.5.
Freeport-McMoRan (FCX) January 44 Calls – FCX gained 3% last week and may be shaping up again. Option activity remains strong despite the stock mostly chopping around for weeks.
Freshworks (FRSH) October 22.5 Call – FRSH had a bad week as the stock fell 8% along with many of its growth stock peers. This trade is going to have its ups and downs, that is for sure.
Intel (INTC) January 34 Call – INTC continues to look great as the stock was mostly unchanged last week even as the semiconductors came under pressure. As I wrote late last week, option activity remains very strong.
Of note, on Friday a trader bought 13,000 Intel (INTC) October 38 Calls for $1.46 – Stock at 38 (rolled from September calls).
IonQ (IONQ) September 15 Covered Call – IONQ closed above our short strike price Friday which means we locked in a profit of 11.69% on our trade and no longer own a stock or option position. Great trade.
Nasdaq ETF (QQQ) December 370 Puts – The QQQs fell marginally last week and we will continue to hold our puts against a bullish portfolio just in case the market tips over yet again.
Shopify (SHOP) January 62 Call – SHOP pulled back some last week, though it’s hardly dying. Much like most of our growth stocks, I think SHOP will work IF the market gets in gear.
TJX (TJX) April 92.5 Calls – TJX continues to look fantastic amidst a market that looks “so/so.” Not much more to add.
UBER (UBER) December 40 Calls – Impressively, UBER gained another 1% last week even as growth stocks came under pressure. Our position is in terrific shape.
Financials ETF (XLF) March 33 Put – For now my buy of the XLF March 33 puts looks somewhat ill-timed as the financials have risen some. That being said, I’m not worried about a short term move for a longer-term hedge.
Energy ETF (XLE) January 85 Calls – The XLE looks spectacular and our trade is in great shape at a potential profit of approximately 65%.
