September 4, 2024
HPE Earnings and Mental Stop on WMT Position
This afternoon after the close, Hewlett Packard (HPE) will report earnings. Headed into the event, we are holding the January 22 calls that are not working as of yet, though admittedly, the stock looks “decent” headed into the event.
I am going to continue to hold my calls through earnings as the stock looks decent, and option activity continues to be bullish. Also, the price of our calls is too cheap for me to sell given the bullish option activity.
HPE - With the stock trading at 18.6, the options market is pricing in a move of $2 this week, or 16.6 to the downside and 20.6 to the upside.
Open interest is skewed bullish on a ratio of 3.4:1 call vs. put.
Skew is pricing in typical downside fear and upside interest.
Moving on …
The market, led by the Nasdaq and the Semiconductors, got hit hard yesterday. Only time will tell if this was a one-day event or the start of a larger decline … of note, for now, the market is very quiet today and is mostly unchanged.
IF yesterday’s sell-off was the start of a more meaningful decline, today I am going to set a mental stop on our WMT calls which are at a big profit.
With the stock trading at 77, our WMT January 65 calls originally purchased for $4.35, are now worth $13.50. I am going to set a new mental stop on these calls at $10, which would likely trigger if WMT stock were to trade somewhere near 73.5 (approximately).
Weekly Update
September 3, 2024
Ahead of the long weekend, and the unofficial end of summer for the trading community, it was a mostly quiet and mixed week as the S&P 500 was unchanged, the Dow gained 0.9%, and the Nasdaq fell 0.7%.
Stocks on Watch
The leader in terms of option activity coming out of last week is Pinterest (PINS), following this unusual call buying Friday:
Buyer of 6,000 Pinterest (PINS) September 32 Calls for $0.95 – Stock at 32
Buyer of 11,500 Pinterest (PINS) September 32.5 Calls (exp. 9/13) for $0.43 – Stock at 31.7
Buyer of 8,000 Pinterest (PINS) September 34 Calls (exp. 9/13) for $0.24 – Stock at 32.
While PINS stock looks pretty dreadful (though slightly improving), this call buying is intriguing and I am going to keep an eye on the stock for further bullish option activity.
In terms of best-looking stocks on my radar for new buys following our purchase of RKT last week, I continue to monitor GE (stock looks great), CZR (bullish option activity two weeks ago), as well as BBY which surged higher on earnings last week.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 15.5, which is pretty much in the middle of its “normal” range for the last year (with 12 being the low, and 20 being the highs). This is encouraging in my opinion for the market as we inch towards the election.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 6
Wednesday – 5
Thursday - 5
Friday – 6
Events for the Week to Come
The big event traders will be focused on this week is the August Jobs Report Friday morning. Otherwise, it should be a somewhat quiet week in terms of macro events.
Below are the Most Anticipated Earnings Releases for the week, and as you can see, earnings season is starting to slow down as Broadcom (AVGO) Thursday is one of the few big announcements this week.
What Traders are Saying
Last week in “What Traders are Saying” I discussed the pricing of the NVDA Straddle ahead of earnings, and I noted that I would follow up with how these two trades would have worked …
Buy of the NVDA August 129 Straddle (exp. 8/30) for $14
Buy of the NVDA October 130 Straddle for $24.
So here is how those trades would have performed, the day after earnings, and then by the close of trade on Friday.
An hour into the trading day on Thursday, with the stock down $4 on the day following earnings and option volatility dropping like a rock, because the big event had passed …
The August 129 straddle, which was fictionally purchased for $14, had lost half of its value, and was worth $7.
The October 130 straddle that we had theoretically purchased for $24 had lost $5 of its value, and was worth $19.
Essentially, the hurricane (earnings) had passed and traders no longer wanted to own insurance against a big market move, and because of that the price of options dropped dramatically.
Fast forward then to the end of the trading week Friday …
The August 129 straddle that was purchased for $14 expired at $10 (had regained some value as the stock had continued to fall).
The October 130 straddle that was purchased for $24 closed the week at $19.5. Big loser though not a total train wreck, and this position still has another 45 days until its expiration.
And while these two trades would have been losers, I am not highlighting the strategy and trades to dissuade you from buying straddles. Instead, it’s simply an options education opportunity to show you the strategy, as well as highlight how options lose value after a big earnings event.
Open Positions
Robinhood (HOOD) January 15/37 Bull Call Spread – HOOD fell marginally last week and mostly remains in good shape. Our position is now at a potential profit of approximately 125%.
Hewlett Packard (HPE) January 22 Calls – HPE will report earnings on Wednesday and this will likely be the make-or-break moment for our position. I will send a full breakdown ahead of earnings Wednesday morning.
Lyft (LYFT) August 16 Covered Call – LYFT went nowhere last week, which is perfectly fine for our October 13 Covered call that continues to decay (good).
Marijuana ETF (MSOS) September 9 Covered Call – The MSOS came under pressure last week on cannabis-sector news that traders interpreted to mean that positive catalysts could be pushed out to the end of the year (maybe). Regardless, the September 9 call that we sold for $0.54 is now worth $0.04 (good).
On Holding (ONON) January 42.5 Calls – ONON broke out to a new high early last week before pulling back marginally to close the week. Without question, ONON has the look of a retail leader.
Palantir (PLTR) January 26 Calls – PLTR pulled back marginally along with many of its AI peers last week, though the stock continues to look outstanding. Also, option activity continues to point to higher prices to come, including this trade from Friday:
Friday - Buyer of 4,000 Palantir (PLTR) January 49 Calls for $0.49 – Stock at 31.5.
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.
Rocket (RKT) March 20 Calls – RKT is the newest addition to the portfolio following several weeks of stock outperformance and a recent surge in call buying. The stock pulled back a bit after our buy, but for now at least this feels like normal action after a strong move higher.
Unity Software (U) December 18 Calls – This morning Morgan Stanley upgraded U to Overweight with a price target of $22, noting, “Over the past 12 months, Unity shares have underperformed the S&P 500 by ~80% as execution headwinds, management turnover, and a major restructuring led to a significant expectations reset. But following the cut to ’24 guidance at 2Q results, we now view forward estimates for U as derisked.”
Walmart (WMT) January 65 Calls – WMT continues to break out to new highs seemingly every day since earnings. At this point our calls are at a potential profit of approximately 210%.
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