September 29, 2023
Stock on Watch – Square (SQ)
The market is having its second day in a row of positive action as the S&P 500 and Nasdaq are higher by 0.4% and 0.7%, respectively. This is an encouraging sign for the market, though two days is not exactly an “all signs are clear” type of situation after a steep decline of approximately 5% for the market the last two weeks. And in fact, even as I’m writing, the Dow has now drifted to be down on the day.
In terms of option activity, it’s been pretty quiet as the moves in the stock market and bond market have likely shaken up the trading world and the big market players may be as concerned as the everyday investor.
And while option trading has been quiet recently, one stock that has attracted multiple days of bullish option activity is Square (SQ) which has been a stock disaster the last couple of years, and even in an up year for the Nasdaq in 2023, SQ is lower by 28% year-to-date.
However, despite the stock struggle, twice this week SQ has hit my radar following big call buying. Here are those trades:
Today - Buyer of 8,000 Square (SQ) November 45 Calls for $3.80 – Stock at 45
Tuesday - Buyer of 20,000 Square (SQ) January 50 Calls for $3.46 – Stock at 45.
I really try to not get involved with stock disasters as more times than not these weak stocks continue to drift lower or hardly rally.
That being said, IF I wanted to get involved with SQ following this call buying in an attempt to “buy the dip” I might target the February 45 calls for $6.50 (please note, I am not buying these calls).
September 26, 2023
Position Update – XLF Puts
The market is getting hit hard today with the S&P 500 lower by 1.4%, led by weakness in the Financials (XLF), as Citigroup (C) is at a new 52-week low, Bank of America (BAC) is approaching its 2023 low and the stocks that make up the sector generally look terrible.
Fortunately, we own the Financials ETF (XLF) March 33 puts which is a bet against the financials. We bought these puts a month ago when the sector was breaking down because the sector looked terrible, option activity was bearish, and the price of the puts that we purchased were incredibly inexpensive.
Fast forward to today, and the XLF is again approaching the 33 strike which we bought puts on, and I continue to be shocked that the March 33 puts, which will give a buyer bearish exposure for six months and two rounds of earnings for the sector, only cost $1.35. This is mind boggling to me.
Anyway …
I am going to continue to hold my bearish position as these puts feel like a perfect hedge against continued market weakness.
One final note, if you didn’t buy the XLF March 33 puts when I recommended them last month and are debating adding bearish exposure, as noted above I think these puts are a very inexpensive way to hedge or get downside exposure.
September 25, 2023
Weekly Update
It was a somewhat ugly week for the market as the Federal Reserve continued to push its hawkish agenda and the bond market reacted violently. By week’s end the S&P 500 had lost 2.93%, the Dow had fallen 1.89%, and the Nasdaq had declined by 3.62%.
Stocks on Watch
Having re-shuffled the deck a bit late last week with the portfolio’s holdings (sold FCX/SHOP and bought LI) and the market still suspect, I’m not in a giant rush to add more exposure. That being said, here are some trades that caught my eye last week:
Nutanix (NTNX), like most growth stocks that broke out on earnings, recently has given back some of its post-earnings gains. However, the stock has certainly not died like many of its peers. And on Wednesday a trader bought this call position looking for a move higher by October expiration:
Wednesday - Buyer of 3,000 Nutanix (NTNX) October 35 Calls for $0.95 – Stock at 34.
I like the way NTNX has held up amidst the selling pressure. That being said, we need the market to firm up before we add more growth exposure.
Next up is Pfizer (PFE), which has been a mess along with its pharmaceutical peers the last couple of months. However, on Friday a trader bought this large call position looking for an end-of-year rally:
Friday - Buyer of 30,000 Pfizer (PFE) January 35 Calls for $0.90 – Stock at 32.75.
If I were to get involved with PFE, I would probably target a call closer to the current stock price and give the trade more time. Something like the March 32.5 call for $2.25 (approximately).
And finally, if I was looking for warning signs for the market, the pickup in bearish option activity in financials and real estate stocks late last week is somewhat concerning. Here are some of those trades:
Buyer of 2,000 Blackstone (BX) December 100 Puts for $2.45 – Stock at 111.5
Buyer of 2,500 Vornado (VNO) December 22.5 Puts for $2.10 – Stock at 23
Buyer of 11,000 Regional Bank ETF (KRE) October 40/36 Bear Put Spread for $0.55 – Stock at 41.5.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 17.20, or higher by 18%. Of note, options trading by the hedge funds/institutions that I track slowed greatly last week, likely as a result of the Fed event, and then subsequent big moves in the bond market that has traders uneasy.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday – 4
Friday – 5
Events for the Week to Come
The likely biggest driver of market action this week will be the continued volatility in the bond market. And for better or worse, traders will be closely watching the Fed’s preferred inflation report, the PCE Prices Index (PCE), before the open on Friday.
On the earnings front, it will be another quiet week, with the highlights coming from Costco (COST) on Tuesday, Micron (MU) on Wednesday and Nike (NKE) on Thursday.
What Traders are Saying
On Wednesday of last week I highlighted a trade that I was not going to execute ahead of the Fed event, but that I thought was interesting for educational purposes. Here were some of the details and then a look at how the trade would have worked out if we were involved:
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.
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.
Fast forward to Monday morning, and if I wanted to exit this “fictional” trade ahead of expiration, and with the SPY lower by 2.7% since the educational piece was written on Wednesday, the 443 call that we could have bought will expire worthless, however, the 443 put could be sold for $12.
Essentially the market moved WAY more than the options market had predicted, and a straddle buyer would have made $750 per straddle purchased, or a profit of 167% in two days’ time.
Open Positions
Cameco (CCJ) March 40 Calls – CCJ was mostly unchanged last week, though on Friday call buying again ramped up including these trades:
Buyer of 16,000 Cameco (CCJ) September 42 Calls (exp. 9/29) for $0.20 – Stock at 40
Buyer of 2,000 Cameco (CCJ) December 50 Calls for $0.64 – Stock at 40.30.
Cleveland-Cliffs (CLF) October 15.5 Covered Call – On Tuesday of last week we sold the October 15.5 call for $0.25 against our stock position. As I wrote in the trade alert, we aren’t going to retire picking up $0.25 on a covered call, but it is a nice “dividend.”
DraftKings (DKNG) January 25 Call – Here we go again with DKNG as the stock looked terrific two weeks ago and is now “back in the soup”. If we hadn’t taken partial profits twice already on this position, I would be more worried.
Freshworks (FRSH) October 22.5 Call – FRSH fell 3% last week which isn’t the end of the world for a growth stock. For now, we will hang out with our covered call as is.
Intel (INTC) January 34 Call – UGH, INTC! This stock went from great hope to “meh” and maybe even worrisome last week. Fortunately, we have partial profits in the bank, but I can tell you I was more excited about this position when the stock was trading closer to 40 than its close at 34.5 on Friday.
Li Auto (LI) June 40 Call – LI is the newest addition to the portfolio following weeks of bullish option activity. And that continued on Friday when a trader bought 4,000 Li Auto (LI) June 30 Calls for $13.20 – Stock at 39.3.
Nasdaq ETF (QQQ) December 370 Puts – For better or worse our QQQ puts are back alive as the Nasdaq is once again testing its recent lows. This is why we own puts against a bullish portfolio.
TJX (TJX) April 92.5 Calls – TJX fell 3% last week, though it still looks fine. Not much more to add.
UBER (UBER) December 40 Calls – UBER lost 6% last week and like DKNG is “back in the soup.” Though of note, on Thursday a trader opened a large and aggressive bull risk/reversal. Here is that trade: Buyer of 9,000 Uber (UBER) November 47.5 Calls and Sale of November 37.5 Puts – Stock at 45.
Financials ETF (XLF) March 33 Put – Much like our QQQ puts, for better or worse the XLF looks horrible again, and our puts are back in gear. And much like the QQQ bearish position, this is why we own the XLF put position … it’s better to buy puts when you can, not when you have to.
Energy ETF (XLE) January 85 Calls – The XLE fell 3% last week though it continues to be the best-looking sector in the market. Our position is in good shape.
