October 27, 2022
PINS/GOOGL/CCJ Earnings, as Well as AAPL and AMZN Breakdowns
Earnings season, in a wild market, is acting as we might expect … Some stocks have blown up (GOOGL/MSFT/FB), while others have shown some signs of hope (BAC/WING/CAT).
Unfortunately, we own Alphabet (GOOGL) which fell hard on earnings on Tuesday night. While we only held half of a position heading into the event, the stock falling 11% in the days that followed was not great. I would anticipate exiting this trade in the days to come so that we can move the remaining capital into fresher ideas.
Cameco (CCJ) reported earnings this morning before the open, and the stock move after the announcement has been a non-event. This is a great situation for our short volatility, covered call. We will continue to hold this position, so as to collect more and more decay in the weeks to come.
Next up in the earnings bonanza for our portfolio is Pinterest (PINS), which will report earnings today after the close. How to manage this stock and situation is, to be honest, not easy.
On the one hand, social media stocks have been obliterated following reporting earnings as SNAP and FB were total disasters. Those stock reactions have me concerned about PINS tonight.
On the other hand, it’s also possible that the worst has been priced in for the group, and should Pinterest meet, or even beat, expectations, the stock could take off.
Hmmm, NOT an easy decision on how to manage this position!
Because we own March calls, that have a ton of time until expiration I am going to hold my position through earnings tonight.
However, if you don’t want to take the risk, you must Sell to Close your position, or a portion of your position, before the close of trade today.
Below are the earnings breakdowns for PINS, as well as AAPL and AMZN, who will also report after the close today.
PINS - With the stock trading at 22, the options market is pricing in a move of $4 this week, or 18 to the downside and 26 to the upside.
Open interest is skewed bullish on a ratio of 2.2:1 call vs. put.
Skew is pricing in extreme downside and upside risk.
AAPL - With the stock trading at 145, the options market is pricing in a move of $8 this week, or 137 to the downside and 153 to the upside.
Open interest is split evenly call vs. put.
Skew is pricing in more downside risk and upside interest than I would expect for AAPL’s earnings.
October 24, 2022
Stocks on Watch – China Stocks
I am no expert on China’s political power plays, much like my self-admitted lack of expertise on Russia/Eastern Europe war dynamics in previous months. But that doesn’t mean I’m not watching the China stock meltdown today with great interest.
For some light context, and again I’m no expert, this weekend Chinese President Xi packed the Politburo with his loyalists. The implication of this development is Xi strengthened his political hand and can continue to tighten regulations on the tech and private sectors, as well as continue the country’s “zero covid” policy, and of potentially bigger concern, what does this mean for China’s aspiration for the region?
The reaction to this development in Chinese stocks is NOT good. Here are some of the losses in early trade today:
China Internet ETF (KWEB) down 20%
Alibaba (BABA) down 20%
JD.com (JD) down 21%
Baidu (BIDU) down 19%
Pinduoduo (PDD) down 34%
What makes these dramatic declines so “impressive” is these former leaders had been massacred even before today, as KWEB/BABA/JD are now down 60-70% in the last year. Ouch!!!
So, what am I seeing in early trade today? Traders are mostly trying to buy the dip via options, as seen below:
Buyer of 2,000 Alibaba (BABA) June 70 Calls for $8 – Stock at 59
Buyer of 20,000 Baidu (BIDU) November 80 Calls for $5 – Stock at 75
Buyer of 11,000 Taiwan Semiconductor (TSM) December 65 Calls for $2.50 – Stock at 61
Buyer of 4,000 Taiwan Semiconductor (TSM) January 65 Calls for $3.50 – Stock at 61
I’m personally not going to get involved with these stocks … for now.
However, if I were to, the KWEB January 20 Call (exp. 1/2024) for $4 is an attractive “throw it in the back pocket” way to get longer-term bullish exposure.
October 14, 2022
Weekly Update
Maybe, just maybe, last week was the start of a fourth quarter market run, as the S&P 500 gained 4.75%, the Dow rose 4.9%, and the Nasdaq added 5.22%.
This week earnings season really gets in gear … buckle up, and be prepared to jump into some earnings season winners if the market can continue to show signs of strength.
Stocks on Watch
First off, let me say I’m becoming slightly more encouraged by option activity, as noted below in the Volatility section. Maybe the big players are getting more interested in adding bullish exposure.
And while I am in wait-and-see mode ahead of earnings season in terms of new buys, I did want to note two stocks that saw unusual call buying activity last week.
To start, here is a small sample of the wild call buying in Petrobras (PBR), and then I will dive a bit deeper into these trades:
Wednesday - Buyer of 30,000 Petrobras (PBR) November 17 Calls (exp. 11/4) for $0.27 – Stock at 14.5 (earnings 11/3)
Friday - Buyer of 10,000 Petrobras (PBR) November 17 Calls for $1 – Stock at 16
Friday - Buyer of 14,000 Petrobras (PBR) December 19 Calls for $0.50 – Stock at 16.
What might be the reason for this call buying?
First, the company will report earnings on November 3. This is one catalyst.
The other potential catalyst is Petrobras is a Brazilian company, and the country is scheduled to have a runoff election for President on October 30. The results of this election will very likely move the Brazilian stock market, and one of its largest companies, which is Petrobras.
Moving on to another catalyst-driven options trade, two weeks ago The Wall Street Journal reported that Nutanix (NTNX) was exploring a sale after receiving takeover interest. And while the article went on to say it is far from certain a deal will be made, the stock in reaction to this news rallied from 21 to 26.5 that day. And on Thursday a trader bought the following position, looking for the stock to make a big move higher, likely on a takeover:
Buyer of 18,000 Nutanix (NTNX) December 32.5 Calls for $0.75 – Stock at 26.35.
This trade feels like it is a pure takeover play, though admittedly if I wanted to get exposure to a deal getting done, I would target a call buy closer to the current stock price … perhaps on the 27.5 strike.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week below 30 for the first time in some weeks, though admittedly marginally so. Regardless, any weakness in the VIX is potentially a good sign for the market.
And while I am happy to see the VIX finally give up some ground, I wouldn’t expect to see the “fear index” fall dramatically from the 30 level ahead of the Federal Reserve announcement and the midterm elections in early November.
Option Order Flow was fairly strong this past week as my Options Barometer came in at:
Monday – 6
Tuesday – 7
Wednesday – 5
Thursday - 5
Friday – 6
Events for the Week to Come
This week traders will finally get a break from Federal Reserve member speeches as the Central Bank enters its blackout period ahead of the much-anticipated November 2 meeting.
And while Fed speak will slow down, there will be a handful of economic data points to watch this week, led by Consumer Confidence on Tuesday, New Home Sales on Wednesday, third-quarter GDP on Thursday, and PCE Inflation data on Friday.
Also, earnings season ramps up in a BIG way this week as 20% of the S&P will report, led by tech titans Microsoft (MSFT) and Google (GOOG) on Tuesday, Meta (META) on Wednesday, and Apple (AAPL) and Amazon (AMZN) on Thursday. Below is a larger look at some of the most anticipated releases this week:
What Traders are Saying
As I go through stocks that have been absolutely decimated in the last two years, I often think to myself, maybe, just maybe, it’s worth taking a shot on a stock rebound here or there. Stocks I often consider are Peloton (PTON), Shopify (SHOP), Alibaba (BABA) and countless more. And while I VERY rarely play a broken stocks coming back to life, I wanted to let you inside my brain as to how I might execute a bullish position.
Take, for example, Opendoor (OPEN), which traded as high as 37 last year, and closed Friday at 2.50 (OUCH!). Last week, I noted a large call buyer in OPEN, looking for a rebound. Here is that trade:
Buyer of 10,000 Opendoor (OPEN) February 2 Calls for $0.75 – Stock at 2.35 (earnings 11/3).
To be honest, I don’t love this trade, and here is why.
Options are a leverage game. I pay a premium in order to have cheap upside exposure compared to buying the stock outright.
However, I would rather pay $250 for 100 shares of OPEN than pay $75 for a call with four months until expiration. Essentially, the stock at $2.50 is a call option itself, and if I wanted to get involved with OPEN, the $175 “discount” to buying the option is hardly worth the decay the option will have.
Conversely, if I wanted to play a SHOP move higher, with the stock trading at 30 I might buy the March 30 call for $6, which in my mind is a better way to get leverage than paying $3,000 for 100 shares (though of note, I am not buying this call ahead of the company’s earnings on Thursday).
Stepping back, there is very rarely a great reason to buy call options in stocks that are trading for $3 or less, as the bang for the buck makes the leverage and risk/reward of options less than optimal.
Open Positions
Biotech ETF (XBI) January 84 Call – The XBI only gained 1.5% last week, which was disappointing. That being said, if “risk on” again becomes the market narrative in the fourth quarter, I like our call position.
Alphabet (GOOGL) February 120 Calls – GOOGL gained 4.8% ahead of earnings on Tuesday. I will dive much deeper into what the options market is pricing in for GOOGL that morning.
Macy’s (M) Stock – M rose 11% last week and is starting to shape up. I’m encouraged.
Occidental Petroleum (OXY) December 65 Call – OXY gained 7% last week as oil stocks again took off. Our trade is in good shape ahead of earnings on November 8.
PayPal (PYPL) March 97.5 Call – PYPL rose 4.5% last week, though it’s still somewhat buried following the stock’s big fall three weeks ago. The company will report earnings on November 3.
Cameco (CCJ) November 27 Covered Call - On Friday we rolled our short October 28 call to the November 27 strike, lowering the breakeven on this position to 25.48.
Pinterest (PINS) March 25 Call – PINS, which looked solid headed into peer SNAP’s earnings, got blasted along with its social media cohort. Pinterest will report earnings on Thursday which will go a long way to this trade’s success/failure.
S&P 500 ETF (SPY) March 420 Puts – For better or worse our SPY puts are at a potential profit of approximately 100%.
Starbucks (SBUX) January 85 Calls – SBUX gained 2.6% and looks great. Our position is in good shape headed into earnings on November 3.
