November 15, 2019
** Please note this morning/afternoon Cabot’s email system had an outage. This is the reason you didn’t receive my Daily Order Flow email until noon, and why we had to send instructions for our Regions Financial (RF) and Lattice Semiconductor (LSCC) buy-writes via text. While email outages are rare, from time to time they do happen. For that reason, if you haven’t done so already, I encourage you to sign up for text alerts. Here is how you sign up for texts:
Click on your name in the upper right corner of the Cabot Wealth website, cabotwealth.com. This will take you to your preferences page. Click on “change personal information” in the top gray box. This will take you to an “Edit Account Details” page where you can add your phone number to receive future texts. **
Moving on to our positions …
Today is the expiration of our Regions Financial (RF) and Lattice Semiconductor (LSCC) buy-writes. We are going to let both positions expire and will move on from these stocks, though for two different reasons.
Originally my plan was to continue to roll our RF buy-write to create more yield. However, I have chosen to let this position expire, as any new upside call premium that I was looking to sell was not worth our time. That being said, should RF fall at some point in the coming days/weeks it is possible that options premiums will again rise to a price I’m more interested in selling.
You do not need to address this position, and come Monday you will be left without a RF stock or option position.
I have chosen to let LSCC expire as well as I don’t love the way the stock has been trading since earnings. It’s hardly has been a horror show, but big picture LSCC is grossly underperforming it’s semiconductors peers, many of which have been ripping higher. This is lack of participation in the rally is somewhat concerning to me, as I could envision a scenario where LSCC falls hard if the market sells off.
You do not need to address this position, and come Monday you will be left without a LSCC stock or option position.
November 14, 2019
Position Updates: JD.com (JD) Earnings and Regions Financial (RF), Lattice Semiconductor (LSCC) Expiration
JD.com (JD) will report earnings before the open tomorrow. Because of the stock strength, as well as the very impressive bullish option activity the past several months, as well as this week (noted below) I am going to take the earnings risk and hold my position.
That being said, if JD were to fall dramatically on earnings this would hurt our position badly. Because of this risk, if you do not want to hold the position through earnings, you must Sell to Close by the close of trade today.
With the stock trading at 33.5, the options market is pricing in a move of $2, or 31.5 to the downside and 35.5 to the upside.
Last earnings cycle, JD rose from 27 to 30.6 on earnings.
Skew is pricing in typical downside fear, with large upside interest.
Open interest is skewed bullish on a ratio of 1.5:1 call over put.
Yesterday – Buyer of 7,000 JD.com (JD) December 37/39 Bull Call Spreads for $0.20 – Stock at 33.4
Yesterday – Buyer of 7,000 JD.com (JD) November 33 Puts for $0.91 – Stock at 33.25
Tuesday – Buyer of 15,000 JD.com (JD) December 37 Calls for $0.64 – Stock at 33.3
Tuesday – Buyer of 2,500 JD.com (JD) January 35/40 Bull Call Spreads for $1.15 – Stock at 33.4
Monday – Buyer of 5,000 JD.com (JD) November 35 Calls for $0.45 – Stock at 33
We have two buy-writes set to expire on Friday. Here are my thoughts on each:
For the past year we have been selling calls and collecting dividends against our long stock position in Regions Financial (RF). In fact, here is the full breakdown of all of the calls we have sold, as well as the dividends collected since November 2018:
November 20 Calls – $0.49 Collected Dividend January 2019 – $0.14
February 16 Calls – $0.28 Collected Dividend April 2019 – $0.14
March 16 Calls – $0.36 Collected Dividend July 2019 – $0.14
April 16 Calls – $0.38 Collected Dividend October 2019 – $0.155
June 16 Calls – $0.28
August 16 Calls – $0.17
October 16 Calls – $0.18
November 16 Calls – $0.47
The net of the calls sold and dividends collected is $318.5 for every 100 shares of stock owned … which is a solid trade on a stock that has mostly chopped around all year.
I am somewhat up in the air going into expiration tomorrow on how to manage this position. My early lean, which is subject to change, is to again roll this position so that we can continue to collect call premiums as well as the $0.155 dividend in early December. I will update my thoughts on this situation on Friday.
On the other side of the coin is Lattice Semiconductor (LSCC) which has also worked out well, though my early lean is to let this position expire as I have my eyes on better opportunities. To review here are our trades in LSCC made in the last several months:
Bought stock at 19.38 – Sold September 20 Calls for $0.64
Bought back September 20 Calls for $0.05
Cost Basis to 18.79
Sold October 20 Calls for $0.80
Bought back October 20 Calls for $0.17
Cost Basis to 18.16
Sold November 20 Calls for $1.32
Bought back November 20 Calls for $0.95
Cost basis to 17.79
Sold November 17.5 Calls for $2.24
Cost Basis to 15.55
I will update JD’s earnings reaction, as well as how we will manage our two expiring buy-writes by noon eastern tomorrow.
If you have any questions about these positions, don’t hesitate to email me.
November 13, 2019
Stocks on Watch
Yesterday I highlighted two ultra-short term call buys in Boston Scientific (BSX).
Here were those trades:
Buyer of 5,000 Boston Scientific (BSX) November 41 Calls for$0.30 – Stock at 40.8
Buyer of 4,000 Boston Scientific (BSX) December 41.5 Calls (exp. 12/6) for $0.60 – Stock at 40.7
And today a trader bought 3,000 January 44 Calls for $0.64 – Stock at 41.20
However, as I noted yesterday “While the premiums paid aren’t huge, I am very intrigued about the ultra-short-term expirations that this trader/traders are targeting. I will dig into BSX to see if there are any known catalysts for this activity.”
One of the most critical components of running Cabot Options Trader is finding stocks that the hedge funds and institutions are targeting. However, the next layer of research is almost as important, which is figuring out why they are buying calls and puts.
And in the case of BSX, I found two potential catalysts for this call buying: The company is presenting at an investment conference tomorrow, as well as a healthcare conference next week. While I like the way BSX stock is trading, I’m likely going to pass on adding the stock to our portfolio until these two events have passed.
Moving on, Sea (SE) was a monster winning position for us earlier this year. And somewhat luckily, shortly after we exited our position the stock sunk.
However, SE shot back on my radar following a blowout earnings report yesterday that caused the stock to soar from 31 to 36.75 on the day.
And today, almost as impressively as the earnings move, SE is handling the announcement of a good-sized convertible note offering very well, having fallen nearly $2 initially on the news, but it’s since rallied to virtually unchanged on the day.
This stock strength, in the face of “bad news” is something that I watch very closely, and a subject of a Cabot Wealth Daily article written by Tyler Laundon, Chief Analyst of Cabot Small-Cap Confidential.
Here is a small sample of the article, which references an exchange between Tyler and myself:
“In these scenarios, a company announces it will raise capital by issuing new shares to the public (secondary stock offering) or by issuing low interest-bearing notes that can be converted into shares, usually within five to 10 years (convertible note offering).
The company completes the offering at an attractive price and the shares are quickly absorbed by the market.
In fishing terms, the market “inhales” the new shares. And the stock’s trend continues, more or less as it had been prior to the secondary offering. Management pursues growth initiatives with the new capital.
Both traders and longer-term investors view a well-received secondary stock or convertible note offering as a bullish signal. Check out this quick exchange I had with Cabot Options Trader Chief Analyst, Jacob Mintz, last week.
Jacob doesn’t do a lot of bass fishing. But he guides his subscribers into many profitable options trades on strong stocks, some of which have recently completed secondary offerings. Year to date, his portfolio is up well over 50%!
The well-received secondary stock or convertible note offering is an especially strong buy signal for certain small-cap stocks. That’s because it signals huge demand for a stock that still has a relatively small public float, as compared to larger companies.
If the market thinks a company is issuing shares to raise cash for good things, like attractive acquisitions, to fund new product development, to expand a sales team to meet demand, etc., then a stock can easily go up after the announcement.
In this bullish scenario there are many investors that are eager to buy the newly issued shares (or notes). And they get inhaled by the market.
Check out this chart of Coupa Software (COUP), a mid-cap stock with a market cap of $7.2 billion. This is the stock Jacob mentioned in our exchange.
Coupa announced a convertible note offering on June 5, pricing of the notes on June 7, and closing of the notes on June 11. Other than a bump in trading volume, there’s little in the chart that tells you the company raised capital. And certainly nothing negative. This all happened in context of the company having reported quarterly earnings just before the announcement, and a somewhat volatile market.”
To read the Tyler’s entire Cabot Wealth Daily on this subject click here.
Also of interest to me regarding SE, outside of the earnings move and stock strength in the face of “bad news,” is option activity including the following trade made this morning:
Buyer of 2,000 Sea (SE) December 40 Calls for $0.70 – Stock at 36
Because of these three bullish signals, SE is at the VERY top of my watch list for a new position.
November 12, 2019
Position Update and Stocks on Watch
As I usually do when our holdings are lifting to new highs, I’m going to share my latest thoughts on these positions in case you want to take a few chips off the table or otherwise adjust.
For example, salesforce.com (CRM) is trading today at a new 52-week high at 163.5. That has pushed our February 155 Calls, originally bought for $8.225, to be worth $14.30, or a potential profit of nearly 75%. I am going to continue to hold this position; however, taking profits is also a fine choice.
Similarly, JD.com (JD) is trading at a new 52-week high at 33.6. However, largely due to time decay, our position is only at a marginal profit. That being said, call buying is again wildly bullish today as traders are aggressively positioning for a big move higher into earnings on Friday. In fact, as of 1:30 p.m. ET call activity is outpacing puts in JD by a ratio of 3.6:1 (85k vs. 23k)
Moving on to stocks I’m targeting for a new call buy are two earnings season winners that are attracting intriguing call buying today.
Boston Scientific (BSX) jumped from 38 to 40 on an earnings beat two weeks ago. Since then the stock has mostly chopped around. However, today a trader/traders have been targeting a move higher very soon. Here are those trades:
Buyer of 5,000 Boston Scientific (BSX) November 41 Calls for$0.30 – Stock at 40.8
Buyer of 4,000 Boston Scientific (BSX) December 41.5 Calls (exp. 12/6) for $0.60 – Stock at 40.7
While the premiums paid aren’t huge, I am very intrigued about the ultra-short-term expirations that this trader/traders are targeting. I will dig into BSX to see if there are any known catalysts for this activity.
Honeywell (HON) is the perfect example of the type of stock that has led the market higher in recent weeks. Since reporting earnings in mid-October HON has risen from 163 to 183 today. And into another strong day for HON a trader bought upside calls looking for even more stock gains. Here is that trade:
Buyer of 2,000 Honeywell (HON) January 185 Calls for $3.15 – Stock at 182
Unfortunately, we haven’t had exposure to cyclical/industrial stocks like HON the past several weeks. However, should the stock attract more call buying, HON is on the top of my watch list for a new bullish position.
November 11, 2019
Sector on Watch – Biotech and Pharmaceuticals
The Biotech and Pharmaceutical sectors have largely traded sideways for the past several years as other “risk on” sectors have largely led the market higher. However, in the last couple of weeks as growth stocks have started to underperform, Biotech and Pharma stocks have started to lead.
For example in the biotech space, last week Dexcom (DXCM), Insulet (PODD), Acadia (ACAD), and Neurocrine (NBIX) made new 52 week and multi-month highs, while in traditional pharma AbbVie (ABBV) and Bristol Myers (BMY) advanced following reporting earnings.
And this morning, into this strength a trader executed a bullish call buy looking for this group to continue to rise. Here is that trade:
Buyer of 9,000 Biotech ETF (IBB) March 119 Calls for $2 – Stock at 110
I am very intrigued by the recent strength in the biotech stocks. That being said, picking one stock from this group can be challenging as a negative result from a drug study could send that stock cascading lower. Because of that risk, and if option activity continues to strengthen, I may target a trade in the IBB, though with a call closer to the current stock price than the trader chose above.
November 11, 2019
Market movement was fairly limited last week, as the S&P 500 gained or lost no more than 0.4% on any day. For the week, the S&P 500 gained 0.9%, the Dow rose 1.2% and the Nasdaq added 1.1%.
This week’s Watch List has a variety of stocks and sectors that have at one time this year been under intense selling pressure but have more recently started to show signs of life, and this week attracted bullish and bearish activity.
Marijuana stocks started 2019 on fire, and have since then come crashing back to earth. Interestingly, though, on Friday two of the leading stocks in this sector saw their stocks surge higher, as well as bullish option activity. Here are those trades:
Friday – Buyer of 5,000 Cronos Group (CRON) December 8 Calls for $0.93 – Stock at 8.25
Friday – Buyer of 5,000 Canopy Growth (CGC) December 20 Calls for prices ranging from $1.70 to $2.50 – Stock at 20
The trades listed above were the largest of those made in CRON and CGC on Friday … though of note, there was considerably more bullish option activity in these stocks. And while I am very intrigued by this action, and the potential for the sector to heat up again, CRON will report earnings on 11/20 and CGC will announce their numbers on 11/14, which could be the catalyst for this activity.
In the last month, I noted unusual call buying in Goodyear Tire (GT), though chose to not follow into a similar position. This was a mistake as GT has risen from 14 to 17 since then. And on Thursday a trader bought more GT calls looking for the stock to continue to rise. Here are the details of that trade:
Thursday – Buyer of 12,000 Goodyear Tire (GT) January 19 Calls for $0.40 – Stock at 17
I am certainly intrigued by the recent stock run as well as this option activity and will continue to keep an eye on GT for a potential new position.
Oil and Gas stocks have started to bounce from their very depressed levels as money has moved into those sectors that had recently underperformed. However, on Tuesday a trader opened a large bearish position looking for the XOP to again fall. Here is that trade:
Tuesday – Buyer of 54,000 Oil & Gas ETF (XOP) June 24 Puts for $2.92 – Stock at 23.5
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week virtually unchanged at 12. Interestingly, for the second straight week, my Options Barometer came in at a 5 every day last week, which leads me to believe that traders are not yet believers in the market’s new all-time highs. At the same time, the VIX at 12 is signaling traders have little fear of a major market decline.
Option Order Flow was 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
Please note that there is the potential for trading to be slow and illiquid today as the banks are closed in celebration of Veterans Day.
While traders will be closely watching the Consumer Price index on Wednesday and Producer Price Index on Thursday, the likely largest driver of potential market movement this week will be Fed Chair Jerome Powell’s public speech Wednesday in front of the Congressional Joint Economic Committee. Of note, Fed Funds Futures are now indicating a 7% chance of another rate cut this year, down from nearly 20% a week ago.
And while earnings season has moved into the later innings, there are still several high-profile companies reporting this week including:
Tuesday – Cronos Group (CRON), D.R. Horton (DHI), HUYA (HUYA), Sea (SE), Skyworks (SWKS), YY (YY)
Wednesday – Cisco Systems (CSCO), Canada Goose (GOOS), NetApp (NTAP)
Thursday – Aurora Cannabis (ACB), Canopy Growth (CGC), Nvidia (NVDA), Sina (SINA), Weibo (WB), Walmart (WMT), Williams-Sonoma (WSM)
Friday – JD.Com (JD)
What Traders are Saying
Even though the indexes are at all-time highs, as we know, trading in individual stocks has been choppy and sloppy for the past several months. And the perfect illustration of this is the performance of Blackstone (BX) last week.
Last Monday BX made a new multi-month high above 54 and looked on the verge of a major breakout. And with the indexes charging higher, BX looked like a real market leader that was likely to rally even further.
Then out of the blue, even as the market was strengthening, BX fell 4% on the week, closing Friday at 51.5.
Now is this a position crushing decline? Hardly. That being said, it wasn’t particularly pleasant either.
Regardless, when stepping back and evaluating the trading in individual stocks there is no doubt that because of these sudden rotations, where one day a stock looks fantastic, and the next day not so much, I will continue to take profits on half of our positions when they are available, and then go for the home run on the balance.
8 Long positions: BX, CRM, KO, JD, LSCC, RF, SNAP, TGT
Positions not impacting my decision making: FB
Short positions: SPY
Blackstone (BX) March 52.5 Calls – Disappointingly, BX fell 4% last week on seemingly no significant news. See What Traders are Saying above.
Coca-Cola (KO) February 55 Calls – KO lost 3% last week as “safe dividend” stocks fell out of favor. However, into that decline, a trader bought over 50,000 December 55 calls.
Facebook (FB) December Iron Condor – FB fell 1.44% on the week which was absolutely perfect for this short volatility position. Very quickly our Iron Condor is at a profit of approximately 5%.
JD.com (JD) January 32/38 Bull Call Spreads — JD gained 5.5% on the week and closed just short of a new multi-month high. Earnings this Friday will likely make or break this position, and I will write up my thoughts on these earnings on Thursday.
Lattice Semiconductor (LSCC) November 17.5 Buy-Write – LSCC closed Friday at 19.73, well above our short November 17.5 strike. Unless there is a dramatic drop in the stock by this Friday, we will likely be taken out of our position for a nice profit. I will update this position as we get closer to expiration Friday.
Medtronic (MDT) November 100/November 111 Bull Call Spreads — On Tuesday Medtronic dropped through my mental stop and we sold the balance of our position for a profit of 85%. While I am disappointed that we gave up some of our profits, at the end of the day this trade worked well.
Regions Financial (RF) November 16 Buy-Write — RF closed Friday at 16.88, well above our short November 16 strike. Unless there is a dramatic drop in the stock by this Friday, we will likely be taken out of our position for a nice profit. I will update this position as we get closer to expiration Friday.
Salesforce.com (CRM) February 155 Calls — CRM added 0.86% on the week and continues to look like a market leader. Our position is at a profit of approximately 50%.
Snap (SNAP) December 16 Buy-Write — SNAP fell 6.5% on the week as growth stocks continued to underperform. This weakness and mixed option activity are why I rolled this buy-write to December.
S&P 500 ETF (SPY) March 298 Puts – Because of the market’s advance our hedge is starting to lose value. That being said, one bad week for the market and these puts will explode in value again. And because we have a portfolio of bullish positions, I will continue to hold our puts.
Target (TGT) January 110 Calls – TGT gained 2.2% on the week and looks “fine.” Earnings on 11/20 will likely be the biggest driver of success/failure of this position.