Weekly Update
August 26, 2024
Note: Due to the Labor Day market holiday next Monday, you will receive your next Cabot Options Trader Pro update on Tuesday, September 3.
The many stock market worries of just three weeks ago appear to be a thing of the past as the S&P 500, Dow and Nasdaq all gained just over 1% last week, and all are now within striking distance of all-time highs.
Stocks on Watch
Before I dive into a stock that I’m very interested in buying, I did want to note that on Friday there was very strong option activity in several tech leaders. Here is a small sample of those trades:
Buyer of 7,500 Taiwan Semiconductor (TSM) November 175 Calls for $12.70 – Stock at 171
Buyer of 1,200 Taiwan Semiconductor (TSM) December 210 Calls for $4.20 – Stock at 171
Buyer of 2,000 Meta (META) January 680 Calls for $10.10 – Stock at 532
Buyer of 2,900 Palantir (PLTR) December 36 Calls for $2.52 – Stock at 32.
Again, the trades above are just a super small sample of the bullish option activity, but I did want to share with you that traders were fairly bullish in the options market following Fed Chairman Jerome Powell’s dovish speech on Friday.
Moving on …
On Friday a trader bought October calls in Caesars (CZR) which has seen several bullish waves of call buying in the last two weeks, though of note the call buying the previous week was targeting a much longer-term time horizon. Here are those trades:
Friday - Buyer of 6,700 Caesars (CZR) October 44 Calls for $0.87 – Stock at 38.4
August 14 - 16 - Buyer of a total of 16,000 Caesars (CZR) January 50 Calls (exp. 2026) for $4.50 – Stock at 36
August 14 - Buyer of 10,700 Caesars (CZR) June 45 Calls for $4 – Stock at 36.
I’m pretty interested in this situation as the CZR call buys the previous week were intriguing, and then the call buy on Friday is yet another signal that traders are looking for a fairly large move higher in the shorter, as well as longer, term.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16, which is back near its “normal” levels following the super spike above 66 just three weeks ago. This pullback in the VIX is very encouraging in my opinion as traders are seemingly less worried about the Yen Carry Trade, Middle East turmoil, U.S. recession, or any of the other hot spots that caused the “fear index” to surge higher in early August.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Thursday – 4
Friday – 6
Events for the Week to Come
The big macro event for this week will once again be inflation related as traders will be focused on PCE Prices on Friday (Federal Reserve’s “favorite” inflation number), and to a lesser extent GDP on Thursday.
In terms of earnings this week, the “Big” report of the week will be NVDA on Wednesday, though there are a handful of other interesting tech reports including CRM, DELL, CRWD and a handful of Retail plays led by ULTA, GPS and BBY.
What Traders are Saying
I received this question from an Options Trader subscriber that I wanted to share with the bigger group:
“I have never executed a Long Straddle but wondering if it makes sense on NVDA with earnings coming next week? I imagine it would be very costly and require a substantial move to be profitable.
“If I were to consider one, would you suggest a near month/week maturity? Also, does it make more sense to use far away strikes?”
First let’s dive into the mechanics and risk/rewards of a Long Straddle.
A straddle is a good options strategy to pursue if a trader believes that a stock’s price will move significantly, but is unsure of which direction.
To purchase a straddle, a trader buys a long position in both a call and put with the same strike price and expiration date.
For example:
Stock XYZ is trading at 40
If you were to buy a straddle on stock XYZ, you would simultaneously do the following:
Buy the XYZ June 40 Call
Buy the XYZ June 40 Put
For a total debit of $4.
If the stock were to close at 40 on the June expiration, you will lose $4 as both the call and put would expire worthless.
If the stock were to close at 36 or 44, you will break even.
If the stock were to go below 36 or above 44, you will make one dollar for every dollar the stock moves outside of 36 or 44.
Here is a graph depicting the Profit and Loss of a Long Straddle:
OK, now let’s dive into NVDA …
As the subscriber noted, the options prices in NVDA are very expensive, which makes this a somewhat tricky trade. In fact, if a trader wanted to buy the 129 straddle expiring this Friday, it would cost $14, which means the stock would need to go below 115 or above 143 just to break even. Essentially, the stock needs to move nearly 11%.
And while an 11% move sounds big, there have been several occurrences over the last six quarters where NVDA stock has moved that much, or more.
Here are those stock moves (on the right):
Essentially, in three quarters the stock moved more than 11%, and in three quarters it did not, which makes this a somewhat fairly priced straddle going into earnings.
Personally, I wouldn’t buy the straddle. It’s not my style.
But if I were to look to buy a straddle I might give the trade a bit more time, as weekly options are a pure boom-or-bust trade.
However, the downside to buying more time is the price goes up.
With all this in mind, and again, I’m NOT buying a straddle for NVDA earnings, but IF I were, I might buy the October 130 straddle for $24.
This trade would give me potential for profits if the stock makes a big move … and if it the stock doesn’t move the straddle won’t go to zero in the blink of an eye (though it will lose a great deal of value if the stock is little changed).
Stepping back, I will track the results of buying the August 129 straddle (exp. 8/30) for $14, as well as the October 130 straddle for $24, and update you how these trades would have worked in this “What Traders are Saying” section next Monday after earnings.
Open Positions
Robinhood (HOOD) January 15/37 Bull Call Spread – HOOD rallied another 6% last week, and our position’s profit is ramping back up (approximately 140%). Also of note, option activity was very bullish on Friday as the stock made a new recent high.
Hewlett Packard (HPE) January 22 Calls – HPE has been improving, though like most stocks it still has some work to do before getting to its June high. Earnings will be released the first week of September.
Lyft (LYFT) October 13 Covered Call – On Thursday we sold the October 13 call for $0.50 after the stock had rebounded nearly $2.50 from its post-earnings low. Of note, the stock was upgraded on Friday by Nomura (though only to Neutral) on “proof of cash generation.”
Marijuana ETF (MSOS) September 9 Covered Call – The MSOS continues to be a sloppy mess, which is totally fine for our short volatility covered call. Because of the choppy stock action and option decay, the September 9 call that we sold for $0.54 is now worth $0.10 (good).
On Holding (ONON) January 42.5 Calls – ONON closed at a new 52-week high on Friday as consumer-related plays have re-awakened in a big way of late. The only “negative” I might point out about this situation is option activity has been mostly quiet in ONON into this stock run … but that is fine as well.
Palantir (PLTR) January 26 Calls – On Thursday we locked in a profit of 88% on another piece of our trade as PLTR was trading at a new 52-week high. And while I think the stock looks great, and option activity is pointing to even more highs (see below), with this choppy market I felt like we had to stick to the profit-taking system with this trade.
Friday - Buyer of 2,900 Palantir (PLTR) December 36 Calls for $2.52 – Stock at 32.
Nasdaq ETF (QQQ) November 430 Puts – For better or worse (definitely better), the market’s advance the last three weeks has hurt our lone bearish position. That is a scenario I can live with as stocks like PLTR/ONON/WMT and more have soared higher recently.
Unity Software (U) December 18 Calls – Slowly but surely U has risen from the dead following the company’s earnings three weeks ago. Maybe, just maybe, we have something with this stock turnaround play.
Walmart (WMT) January 65 Calls – WMT closed at a new 52-week high on Friday and our position is now at a potential profit of approximately 185%. I do love when we find a slow and steady stock that turns out to be a monster winner!
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