Market Update

September 18, 2019
Market Update

This afternoon the Federal Reserve will announce its decision on interest rate policy, followed by Chairman Powell’s press conference to reporters. It is expected that the Fed will cut interest rates by 25 bps, though of note, the odds of such a move have been dropping throughout the last two weeks. In fact, the odds of a rate cut are now approximately 70%.

Of greater interest to me is what the options market is pricing in terms of risk for this event. As of this morning the options market is pricing in a potential move of approximately 0.6% for the S&P 500 today, and 1% by this Friday. This 1% expected move seems fairly small given the uncertainty surrounding a cut or not.

Not surprisingly options trading has been very slow this week ahead of the event as most traders don’t want to get caught stepping in front of a potential steam roller. And because of this lack of activity I have not been able to pick up on any major trends in option activity for the Fed announcement.

We have a couple of positions that are sensitive to the Fed’s decision. That being said, those stocks, like Coca-Cola (KO) and Regions Financial (RF) for example, have already been moving based on the odds of a cut or not.

Regardless, because we added a hedge to the portfolio on Friday, and because we have a relatively diverse portfolio, I am not terribly worried about this event, and we will adjust, and rotate with the market, if need be in the days that follow today’s announcement.

September 17, 2019
Position Update – Snap (SNAP), Lattice Semiconductors (LSCC)

This Friday two of our buy-writes will expire. And while the market’s reaction to the Federal Reserve announcement tomorrow will likely go a long way to determining how we will manage these positions, I did want to update my thoughts on these positions so that you can act if you so choose.

Snap (SNAP) is trading higher by nearly 7% today following an analyst upgrade. This has pushed the stock to 16.85, which is just below our short strike price, and is at our near-perfect spot.

That being said, we are not yet at expiration Friday, and because of this the September 17 calls that we sold for $0.58, are still worth $0.25.

I am going to continue to hold my position as is, and will let the September 17 calls continue to decay.

However, because of the Fed event, and SNAP’s general stock volatility, predicting where the stock will close on Friday is truly anyone’s guess.

For that reason, if you wanted to adjust this position today you could play it two ways:

1. You could buy back the September 17 Call and lock in your profit on that call position, and at the same time exit the stock, and be done with the trade.

2. You could buy back the September 17 Call for $0.25, and sell to Open the October 17 Call for $0.82. This is a roll to a new month to continue to create yield.

Our Lattice Semiconductor (LSCC) buy-write is in even better shape as the stock is now trading $1.30 above our short strike price. Much like our SNAP position I am very likely going to let the position continue to work as we have another $0.10 to collect before expiration Friday.

However, if you are happy with your profit of nearly 6% in one month, and would prefer to exit the position, you could do this two ways:

1. The simplest way to exit the position is to sell your stock out and buy back the September 20 call.

2. The slightly more complicated way to manage this position is to buy the same amount of September 20 puts as you are short of the September 20 calls for approximately $0.10. This, in essence, would close out all of your risk (though of note, should LSCC finish at 20 on expiration Friday you would need to do some adjusting).

If you have any questions about these positions please don’t hesitate to email me. In the meantime, I plan on writing a Fed preview tomorrow morning before the announcement.

Market Update
September 16, 2019

While the story of last week was again massive rotation, the Dow rose for its eighth straight day, its longest win streak since May 2018, and the Russell 2000 exploded higher by 5%. For the week the S&P 500 gained 1%, the Dow rose 1.58%, and the Nasdaq added 0.5%.

Watch List

While the hot money flowed into those stocks that had underperformed for most of 2019 my options scanner picked up on unusual activity late in the week in one stock that has been a disaster this year, and two others that have performed better.

Goodyear Tire (GT) has been a mess for years, and in fact has lost another 31% year-to-date. However, for the past two weeks traders have been aggressively buying calls looking for a rebound. Here are those trades:

Thursday – Buyer of 5,000 November 15 Calls (exp. 11/1) for $0.55 – Stock at 13.8
Thursday – Buyer of 14,000 January 16 Calls for $0.60 – Stock at 13.85
Monday – 10,000 September 12.5 Calls for $0.60 – Stock at 12.8
9/6 – Buyer of 2,000 January 13 Calls for $0.85 – Stock at 12.3

I am very intrigued by this GT option activity as a trader/traders have been actively buying calls, and continue to add to these positions even as the stock has moved higher.

On the other end of the performance spectrum is Lennar (LEN), which is up 37% year-to-date, perhaps aided by the near record-low mortgage rates. And into this rally, a trader executed a bull call spread looking for the advance to continue. Here is that trade:

Thursday – Buyer of 10,000 November 60/65 Bull Call Spread for $0.62 – Stock at 54.5

I really like the risk/reward in this trade. However, risk is high as the company is expected to release earnings later this month, or early in October, which may have me pump the brakes on adding a position similar to this to the portfolio.

On Friday the most unusual option activity of the day was made in ON Semiconductor (ON) when a trader aggressively bought out-of-the money calls. Here is that trade:

Friday – Buyer of 33,000 April 25 Calls for $1.05 – Stock at 20.25

This is an unusual trade as on average ON trades around 3,000 calls per day. Also, this specific trade is peculiar as the trader would need ON to rise nearly $6, or 30%, to break even. I will keep my eye focused on ON for more of this type of activity this week.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 13.81, or lower by 7.5%. And because the VIX, and options prices in general, have fallen so dramatically I decided on Friday the price of put options was too cheap to pass up, and added a new hedge. More on this in What Traders are Saying, below.

Option Order Flow was fairly mixed this past week as my Options Barometer came in at:

Monday – 6
Tuesday – 5
Wednesday – 5
Thursday – 5
Friday – 3

Events for the Week to Come

Very likely the largest driver of market action this week will be the rhetoric surrounding the trade war, rising tensions in the Middle East, and perhaps of greater importance, the long-awaited September Federal Reserve announcement on interest rates on Wednesday.

Heading into the Fed event, Fed Fund Futures are pricing in a 98% chance of a 25 bps cut … though of greater interest, the odds of a 50 bps cut have fallen from 15% last week to zero today.

On the earnings front the following companies will report this week:

Tuesday – Adobe (ADBE), Chewy (CHWY), FedEx (FDX)

Wednesday – General Mills (GIS)

Thursday – Darden Restaurants (DRI)

What Traders are Saying

On Friday we entered our first hedge in many months. Today I want to go into a bit more detail on why we added the hedge, as well as how many contracts I buy when hedging.

First off, I entered the hedge for three reasons:

1. The VIX was trading below 14 for the first time in several months, and it was my opinion that the price was right to buy puts to protect a bullish portfolio.

2. How the market will react to the Federal Reserve announcement on Wednesday is truly anyone’s guess … and for that reason it made sense to add some protection.

3. Option activity was fairly bearish on Friday as traders aggressively bought puts in many of the growth leaders of 2019. And while this is just one sector that was being targeted, again because the price of protection was so reasonable, buying puts for our portfolio made sense.

The second subject I wanted to address is how much of your portfolio you should hedge. To be honest, that is not a question I can answer. Why? We all have different risk profiles. For example, I am 42, and because of my age and various factors I am likely willing to take more risk in my portfolio than a Cabot Options Trader who is 65-75 and could be more in capital preservation mode.

Regardless, when I recommend a hedge for the portfolio, I will risk the same amount of premium as in every other trade. For example, if I bought $10,000 worth of Target (TGT) calls two weeks ago, I will also buy $10,000 S&P 500 ETF (SPY) puts.

Written another way, if I have nine positions each that are worth $10,000, I am only adding one $10,000 put position. In essence, I’m still long $90k of positions, with one short that is worth $10k.

Open Positions

9 Long positions: DIS, KO JD, LSCC MDT, RF, SNAP, TGT, XME
Positions not impacting my decision making: LVS, CRM
Short positions: SPY

Coca-Cola (KO) February 55 Calls – KO fell 1.76% as “safe” stocks fell slightly out of favor. The Federal Reserve announcement on Wednesday will likely set the tone for these stocks in the days/weeks that follow.

JD.com (JD) January 32/38 Bull Call Spreads — JD rose 0.5%, and twice last week nearly broke above 32, before pulling back with growth stocks. Stepping back, JD looks great, and option activity is wildly bullish, perhaps targeting continued positive momentum on the trade war.

Lattice Semiconductor (LSCC) Buy-Write – LSCC gained 4.75%, and closed just shy of 21 on Friday. Our buy-write will expire this Friday, and the best spot for this position is at 20, or above.

Las Vegas Sands (LVS) September 67.5 Calls — Unfortunately, because of time, the remainder of this position will likely expire worthless on Friday.

Medtronic (MDT) November 100/October 115 Diagonal — MDT continues to be a stock star, gaining another 1%. Options traders have aggressively bought calls expiring in every October expiration cycle, likely targeting the company’s various scheduled investor and product meetings in the coming weeks.

Metals & Mining (XME) January 29 Calls — XME exploded higher by 8.3% as stocks and sectors that have underperformed for most of 2019 came back to life.

Microsoft (MSFT) October 115/135 Bull Call Spreads — On Tuesday we closed our MSFT position for a profit of 280%. MSFT is on my list for a new position should software stocks come back to life.

Regions Financial (RF) October 16 Buy-write — My call sale last Friday was poorly timed as RF rose 9% last week. That being said, the stock is marginally above 16, which is a perfect spot for this position on October expiration.

Salesforce.com (CRM) Iron Condor – Impressively, CRM rose 1.25% last week, far outperforming its software/cloud peers, which were hit hard. The stock closed Friday at 153, which is near the ideal spot for this short volatility position that continues to decay/lose value.

Snap (SNAP) September 17 Buy-Write — SNAP is really our only exposure to the hyper growth stocks that were hit hard last week. That being said, SNAP only fell 3.7%, and closed higher Wednesday through Friday, putting it back up to 16. Our September 17 calls will expire this Friday, and we will manage this position based on SNAP’s, and the market’s, performance.

S&P 500 ETF (SPY) March 298 Puts – With the VIX below 14, and headed into the Federal Reserve event this Wednesday, the time was right to add a hedge to the portfolio Friday morning.

Target (TGT) January 110 Calls — TGT fell 1.7% on the week, along with many of 2019’s big winning stocks. Still, TGT looks fine.

Walt Disney (DIS) October 140/160 Bull Call Spreads — DIS fell 1% on the week, with most of the declines coming on Tuesday when Apple announced its streaming product will be priced below Disney’s streaming service. However, DIS rose Wednesday through Friday, nearly regaining all of those losses from Tuesday.

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