October 18, 2024
Stocks on Watch – Morgan Stanley (MS) and Taiwan Semiconductor (TSM)
As I wrote last month when we bought Oracle (ORCL), and months earlier when we purchased Walmart (WMT), when a mega-cap stock breaks out in a big way on earnings, I get super interested. And for now at least our buys of both of those stocks have worked well. This brings me to …
Yesterday Morgan Stanley (MS) rallied 7% following a strong earnings report. And into that stock surge option activity was very bullish as the stock made a new multi-year high. Because we don’t have much financial exposure in the portfolio, outside of HOOD which is the final piece of that trade, I am very intrigued by MS.
Next up is Taiwan Semiconductor (TSM) which is trading higher by 11%, and at a new all-time high following its strong earnings report this morning. And into this rally option activity has been very bullish, including this trade:
Buyer of 68,000 TSM February 195 Calls for $28.10 – Stock at 208 (rolled from November calls).
I like this set-up in TSM as well, and maybe even more than MS. However, we definitely have AI-related exposure in the portfolio via PLTR, ORCL, HPE and GLW. Hmmm. This would be a tough buy given all those positions, however, should the stock and option activity remain strong, we might get involved with TSM.
October 14, 2024
Weekly Update
It was yet another strong week for the market and countless stocks, many of which are breaking out to new highs. At some point the market may cool off, but for now at least, I’m not seeing any truly worrying signs. And in fact, the S&P 500 closed at a new record high as the index gained 1.44% on the week, while the Dow added 1.56%, and the Nasdaq rallied 1.63%.
Stocks on Watch
Having added Corning (GLW) on Friday to a fairly full portfolio, and with earnings season ramping up this week and next (oh, and the election is three weeks away), I’m likely going to sit on our portfolio as is. That being said, if/when earnings stars pop up the next two weeks, we will almost surely be buying if the market is in gear.
And while I am likely going to wait for those earnings stars, I am becoming quite intrigued by IBM (IBM) again, as the stock has been a slow but steady riser for the past two months, and on Friday a trader bought this call position:
Friday - Buyer of 22,000 IBM (IBM) March 280 Calls for $3.30 – Stock at 233.
While mega-cap stocks like AAPL/MSFT have been acting just OK, interestingly stocks like IBM/ORCL/CRM have been busting out to new highs seemingly every day.
Finally, I do want to talk briefly about Nvidia (NVDA) which saw WILD call buying activity on Thursday as a trader aggressively bought March calls totaling nearly $100 million of premium. Here is a super small sample of those trades:
Thursday - Buyer of 5,000 Nvidia (NVDA) March 158 Calls for $10.50, and Buyer of 5,000 March 159 Calls for $10.15 – Stock at 133 (also buyer of March 161 and March 163 calls)
Thursday - Buyer of 35,000 Nvidia (NVDA) March 165 Calls for $9.65 – Stock at 134.5.
NVDA near its highs and showing great strength again, as well as this call buying, is very intriguing to me. The tough part though is the price of these NVDA calls expiring in March are very expensive, which may keep us out of a trade.
That being said, if you were looking for an idea and a way to get bullish exposure to NVDA, the March 135 calls for $21 (approximately) would be the way I might play it.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 20.5.
On the one hand, the VIX above 20 is an odd scenario with the S&P 500 at all-time highs. If these were normal circumstances, I would assume it would be closer to 15. However …
With the election just a couple weeks away, I would be very surprised if the VIX trades much below 18-19 until that event has passed.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 6
Thursday - 6
Friday – 5
Events for the Week to Come
This week the market will turn its attention to earnings season as the macro-economic data slows down and earnings season ramps up in a big way.
Led by Citigroup (C) and Goldman Sachs (GS) on Tuesday and Taiwan Semiconductor (TSM) and Netflix (NFLX) on Thursday, here are the earnings releases that will get the most attention from traders this week:
What Traders are Saying
The bull market of this year is making lots of traders pretty confident in their stock picking abilities, and that’s great. I love to hear about traders making money! However, let’s not lose perspective that stocks can go down. And the email I received last week below (please note, these were not covered calls I was recommending) would be a perfect example of this bravado …
“I have MASSIVE covered call losses. I’ve literally left thousands of dollars on the table. Never again. Covered call selling is just a loser’s strategy, when I can pick stocks this well.”
If I was a contrarian, and I do have some of that in my bones, I would timestamp this email as the market top as this trader is saying that he is making money but not enough money to feel satisfied.
And I get it: If you buy a stock and it goes bananas but you “only” make 5-10%, instead of 20%, that’s disappointing. But you have to realize that when you initially executed the trade as a covered call, you were hoping to make that 5-10%, not 20%.
Stepping back, here is my basic rule for executing covered calls.
In wild bull markets, don’t cap your upside with a covered call if you think the stock could be explosive to the upside.
In sideways or down markets, that is when you want to sell calls against your stock position to create yield and lower your cost basis.
Finally, if this trader next complains about how much he is going to have to pay in taxes this year with his profits, I will let you know that we have definitely reached the market top (I’m mostly joking).
Open Positions
Robinhood (HOOD) January 15/26 Bull Call Spread – HOOD broke out to a new high, which is a great scenario for our January 15 calls that are now at a potential profit of approximately 330%. However, unfortunately (at least for now), I rolled our short call down to the 26 strike which is where the stock is trading as of the close on Friday.
Essentially, let’s see where the stock is in January with how I will manage the 26 call.
Also of note, on Tuesday a trader bought 1,000 Robinhood (HOOD) January 37 Calls (exp. 2026) for $3.85 – Stock at 25.
Corning (GLW) May 47 Calls – On Friday we added GLW to the portfolio via the May 47 calls for $4.40 as option activity has been red hot in the stock as it makes a run at its 2024 highs. I like this setup a lot, though earnings are coming later this month which could be what the recent call buyer has been targeting.
Hewlett Packard (HPE) January 22 Calls – HPE was mostly unchanged on the week, though it continues to look good. Unfortunately, at least for now, the company’s AI day last week was mostly a dud in terms of stock movement.
Lyft (LYFT) October 13 Covered Call – Heading into expiration this Friday LYFT closed last week at 13.45 which for now at least is above our short strike price. Where the stock is trading Thursday/Friday of this week will determine how I manage this position.
Marijuana ETF (MSOS) November 8 Covered Call – The MSOS continues to be sloppy/choppy which is totally fine for our covered call. I’m expecting this will continue to be the case until the election.
On Holding (ONON) January 42.5 Calls – ONON fell marginally last week, but continues to look great and our calls are in good shape at a potential profit of approximately 56%.
Oracle (ORCL) March 160 Calls – ORCL continues to look terrific as the stock is trading just short of its 52-week high. Our calls are now at a potential profit of approximately 67%.
Also of note, on Wednesday a trader bought 5,000 Oracle (ORCL) December 180 Calls for $8.20 – Stock at 174.5.
Palantir (PLTR) January 26/45 Bull Call Spread – PLTR is a total stock star in this environment as the stock busted out to a new high last week, which drove our January 26 calls to a potential profit of approximately 270%.
Also of note, option activity remains red hot, including a buyer Friday of 2,000 Palantir (PLTR) December 30 Calls (exp. 2026) for $21.80 – Stock at 43.85.
Nasdaq ETF (QQQ) November 430 Puts – The election is the last remaining known event for our Nasdaq puts which have done a good job of protecting our bullish portfolio the last couple months.
Occidental Petroleum (OXY) March 52.5 Calls – OXY had a volatile week as oil prices not surprisingly continue to move violently. Regardless, our calls are now at a potential profit of approximately 20%.
Rocket (RKT) March 20 Calls – Why is RKT stock struggling? It’s all about the bond market. Here is what fellow Cabot analyst Mike Cintolo recently wrote about the bond market since the Fed meeting:
“However, a funny thing has happened since the Fed made its move—longer-term Treasury rates, which determine things like mortgage and other borrowing costs, have actually gone up, and steeply, too. Shown below is a chart of the 10-year Treasury yield, which after a sharp trend lower from May to September, has roared ahead more than 40 basis points in three weeks! Not only that, it’s decisively moved up through its 50-day line, cracking the intermediate-term downtrend.”
Unity Software (U) December 18 Calls - U continues to be wild day-to-day, but has been mostly rangebound if you zoom out a bit. That being said, on Friday a trader bought 25,000 Unity Software (U) October 23.5 Calls for $0.44 – Stock at 22, which is a somewhat odd trade as the company won’t report earnings this week.
Walmart (WMT) January 65/95 Bull Call Spread – WMT pulled back marginally last week, but looks great. Not much more to add other than our position is now at a potential profit of approximately 255%.
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