July 22, 2024
Stocks on Watch – Tencent Music (TME)
Before I dive into Tencent Music (TME) I wanted to update you that after this weekend’s political developments, the S&P 500 and Nasdaq are trading higher by approximately 1% this morning while the Dow and Russell 2000 are mostly unchanged. Essentially the rotation of last week is reversing … for now.
Moving on …
Tencent Music (TME) is moving up my watchlist following several days of bullish option activity, including these trades below:
Today - Buyer of 7,000 Tencent Music (TME) October 15 Calls for $1.25 – Stock at 15
Thursday - Buyer of 2,000 Tencent Music (TME) December 18 Calls for $0.67 – Stock at 14.35
7/11 - Buyer of 7,000 Tencent Music (TME) October 15 Calls for $1.45 – Stock at 15
As I noted in my Monday Weekly Review, I’m not in a rush to add exposure today/tomorrow as the market has been acting just “ok” as of late, and clearly, the political theater is likely to continue to move markets.
That being said, I am somewhat interested in this call buying in TME and wanted to put the stock on your radar if you were looking to add exposure via a covered call (buying stock and selling August 15 call) or a call buy with 3-6 months until its expiration (December 15 call buy).
July 22, 2024
Weekly Update
Led by a steep decline in the formerly red-hot Semiconductor sector, the market had a somewhat “gross” five-day stretch. For the week, the S&P 500 fell 2.35%, the Dow rose marginally, and the Nasdaq lost 4.35%.
Stocks on Watch
I could come up with four hot stocks to write about in this Stocks on Watch section that have the perfect combination of option activity and stock set-up, but to be honest, NO ONE knows how the market is going to react to President Biden dropping out of the election today, and in the days to come.
And because of that, let’s just step back and be patient … there is no need to run into traffic with a blind fold over our eyes.
Of note, futures are indicated higher this morning in the pre-market, though I would expect there to be violent swings for the indexes and especially intense sector rotation as traders price in new risks/rewards based on the ever-changing political theater.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed last week at 16.5, which was a somewhat large spike for the fear index after months of mostly trading in the 12-14 range. Though of note, bearish option activity never really exploded despite the market pulling back to close the week.
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 – 5
Events for the Week to Come
The political drama will likely be the largest driver of market moves this week. In terms of “normal” market-moving events, economic data releases this week will be fairly light as the Core PCE (inflation data) report on Friday is the only true headliner.
And while economic data will be mostly quiet, earnings season ramps up, led by Tesla (TSLA) and Google (GOOG) on Tuesday, ServiceNow (NOW) on Wednesday, as well as several Dow stocks throughout the week (VZ, KO, V, IBM).
What Traders are Saying
While it somewhat pains me to do it, every once in a while when option activity is too strong to pass up, I “have to” dumpster dive. And this was the case with our Unity Software (U) call buy last week. This is what I mean …
Over the course of my career, buying calls/bull call spreads on the strongest stocks that are also attracting bullish option activity has been my most successful strategy. Think NTNX/TSM/HOOD/PLTR/WMT as of late.
However, when there is non-stop call buying in a stock that looks terrible – and I mean every single day – I almost have to get involved as my trading thesis is that someone must know something if they are going to risk millions of dollars on call buying every single day.
So, what might be the catalyst this U call buyer is targeting with all these bullish bets?
The dream scenario would be a takeover. Though, more times than not that doesn’t turn out to be the case as takeovers are somewhat rare.
Or another way our U trade could work is if there is a rotation into the worst software stocks, and in fact I have picked up on aggressive call buying in other stocks that fit this category as of late (ZI, GTLB, FLYW).
Finally, the call buying in U which was mostly targeting the August expiration cycle could be an earnings play, as it’s expected the company will report in early August.
Only time will tell if our U trade will work. Though to pay $3.59 for a call with nearly five and a half months until its expiration given the constant bullish option activity felt like a risk/reward that was too good to pass up.
Open Positions
Cameco (CCJ) December 55 Calls – Having exploded higher the previous week, CCJ got clobbered last week. I’m trying to be patient with this trade, but last week’s steep decline certainly didn’t help.
Robinhood (HOOD) January 15 Call – HOOD gave up some ground late last week, though big picture the stock looks terrific. Also, option activity remains very bullish, including this call buy from Monday …
Monday - Buyer of 1,500 Robinhood (HOOD) February 25 Calls for $4.60 – Stock at 23.5.
Hewlett Packard (HPE) January 22 Calls – HPE bled back some of its gains last week, though still looks good. That being said, we need the stock to get back to the 22 level and above for our trade to really ramp higher.
Lyft (LYFT) August 16 Covered Call – LYFT is just so bad as the stock continues to bleed lower. This is good news for our August 16 calls that are now worth $0.20, but bad news for the stock portion of our trade.
Marijuana ETF (MSOS) Stock – I continue to debate selling a new MSOS call against our stock holding, though of note there was aggressive call buying in the ETF late last week, which might keep me on the sideline from selling a new call … maybe.
Novo Nordisk (NVO) September 135 Calls – After looking rock solid for weeks, NVO and its peer LLY got smoked last week. This is NOT what we were hoping for as NVO looked like it was on the verge of truly breaking out. The company will report earnings in early August.
On Holding (ONON) January 42.5 Calls – After looking horrible for weeks, surprisingly ONON sprang back to life late last week even as the market was under pressure. I haven’t been able to find a reason for the stock’s strength to close the week.
Palantir (PLTR) January 26 Calls – PLTR had the strongest option activity of any stock in the market last week, and it wasn’t even close. Literally every single day call buying was aggressively bullish. Here is a VERY small sample of this call buying activity …
Monday - Buyer of 4,000 Palantir (PLTR) October 41 Calls for $0.70 – Stock at 29
Friday - Buyer of 1,000 Palantir (PLTR) September 36 Calls for $1.15 – Stock at 29.35.
Nasdaq ETF (QQQ) November 430 Puts – While our QQQ puts are far out of the money, given the wild political twists and turns, we will continue to hold our bearish position just in case.
Unity Software (U) December 18 Calls – See “What Traders are Saying” above.
Walmart (WMT) January 65 Calls – WMT broke out to a new high again last week and looks terrific. The stock seems to be in the sweet spot of the market right now.
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