September 19, 2024
Position Update – MSOS Expiration
Tomorrow the MSOS September 9 calls that we sold for $0.54 are very likely going to expire worthless. This is a good situation as we picked up another nice premium against our stock holding.
For now, my plan is to let that September call expire (you will not need to address the trade) and then wait until the stock rallies, or until option premiums get a bit more interesting, to sell. Essentially, I don’t want to sell the October 9 calls for $0.06, as that doesn’t move the needle in terms of lowering our cost basis.
And while we won’t be selling a new call today/tomorrow, I will be “hunting” for a new call to sell as I don’t want to simply sit on the stock position for too long.
September 18, 2024
Scheduling Note, and Fed Expectations
Before I dive into the market’s expectations for the Fed announcement later today, I did want to note that I will be off the trading desk on Friday. What this means is there will not be a Daily Option Order Flow email Monday morning, and the Monday Weekly Review will be focused on our Open Positions.
Moving on …
This morning ahead of the “big” Fed event I expect trading will be VERY slow. After all, who wants to step in front of an oncoming bus? That being said, here is what we can infer from data in the bond and options markets …
The market is pricing in a 65% chance of a 50-bps interest rate cut later today, and a 35% chance of a 25-bps cut. If I were to speculate, and I mean TOTALLY guess, I would lean toward a 25-bps cut, but with language from the Fed Chairman in the press conference after the announcement pointing to more cuts to come … but again, that is a total guess.
The options market is pricing in a move of approximately 1% in the S&P 500 today, which seems low to me, but that will depend on if the Fed delivers what traders are expecting.
Let’s see what happens, and we will make moves in response in the days/weeks to come once the dust has settled.
September 16, 2024
Strong Option Activity in Three of our Stocks
While the S&P 500 is mostly unchanged and the Nasdaq is lower by 0.5% – essentially a quiet day – interestingly option activity is red hot in three of our stocks. Let’s dive in …
We just took partial profits of 23% on a third of our Unity Software (U) position. And while I decided to stick to the system and take those initial profits, it wasn’t without debate as option activity is blistering hot in the stock yet again.
In fact, calls are outpacing puts on a ratio of 8:1, and traders are buying out-of-the-money calls in nearly every expiration cycle and strike price, including a buyer of 15,000 October 30 calls (yeesh).
Next up is Oracle (ORCL) which is trading higher by 6% today, and much like U, option activity is red hot in nearly every expiration cycle, including these trades:
Buyer of 3,500 December 185 Calls for $5 – Stock at 169
Buyer of 2,000 November 170 Calls for $5.60 – Stock at 166
Buyer of 18,000 October 200 Calls for $0.55 – Stock at 172.
Of note, our March 160 calls that were purchased for $14.93 two trading days ago are now worth $23.
Finally, Palantir (PLTR) is busting out to a new high again today (36.80), and call buying is once again scorching hot, with a buyer of 10,000 October 38 calls and 10,000 October 40 calls being the most intriguing of these trades (outside of the super short term weekly call buys).
Our PLTR January 26 calls originally purchased for $4.63 are now worth $12, or a potential profit of approximately 160%.
September 16, 2024
Weekly Update
The market bounced back very nicely from the previous week’s losses, ahead of the big Federal Reserve announcement this week. By week’s end the S&P 500 had rallied 3.2%, the Dow added 1.9%, and the Nasdaq rebounded 4.9%.
Stocks on Watch
As we await the big Fed announcement, which will likely set the tone for the market at least for the coming days and perhaps weeks, I thought I would dive a touch deeper into why I bought ORCL on Thursday.
As I noted in the trade alert I am always intrigued when a “mega-cap” stock really breaks out on earnings, as it’s fairly rare for super liquid “known” stocks to meaningfully explode higher on earnings, and that is exactly what ORCL did, as you can see from this chart.
This breakout, reminds me a lot of WMT, which we bought following a big move higher on earnings in May earlier this year. And as you can see, the stock has not stopped chugging higher.
Now, could ORCL’s stock run end soon? Of course. But this really big move higher in the stock following earnings and the subsequent bullish options activity leads me to believe odds favor the stock continuing higher, IF the market can stay in gear.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 17, which is certainly encouraging for the bulls as the fear index fell last week … though I will admit this feels a touch low headed into the Federal Reserve announcement on Wednesday which easily could move the market 2% or more (options market is pricing in a relatively small move of approximately 1.25%).
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 5
Wednesday – 5
Thursday - 6
Friday – 5
Events for the Week to Come
There is no doubt the big event for the week will be the Federal Reserve announcement on Wednesday. Because of that potential market-moving event I would assume, though it’s no guarantee, the market will be quiet today and tomorrow as we await the announcement.
Of note, the bond market is now pricing in an approximate 65% chance of a 25-basis point rate cut Wednesday and a 35% chance of a 50-basis point cut.
On the earnings front, it’s another quiet week, as FedEx (FDX) Thursday is the only “big” announcement.
What Traders are Saying
This week I wanted to share two questions and answers from Cabot Options Traders/Pro subscribers.
COT/COTP Subscriber: I own some PLTR calls that expire in January. I would like something that goes out farther, as at some point I will need to sell the January calls (hopefully I can wait until January). Anything you recommend? Maybe a strike between 33-35? Are there LEAPS? I don’t usually listen a whole lot to the Wall Street analysts but was intrigued that one of them sees PLTR going to 50.
Jacob: If I was looking to roll out of the January calls and then buy a new PLTR call, I might look at the March 36 calls for around $5.50.
Of note, for the Pro service I’ve been debating selling an out-of-the-money January call and turning this into a bull call spread, but I haven’t yet as the stock looks great and the market has been strengthening.
Perhaps something like a sale of the January 42, 43, or 44 calls, which would give the stock more room to run, but would also bring in $1.50 - $2 in premium to lower the cost basis on my trade. But for now, and I mean today, I’m sticking with my January calls as is.
COT/COTP Subscriber: Recognizing the significant volatility of options, do you ever recommend using either stops or trailing stops on call positions?
Jacob: Stops in the options game are HARD. This is what I mean.
Options prices move so dramatically that a $1 or $2 drop in the stock could have an option position down 30-40%.
Now, there’s still a place for stops when it comes to options, and there have been plenty of times I should have stopped myself out (HPE, for example), but there are also times when tight stops could have knocked us out of what turned out to be monster winners (HOOD and PLTR were hardly instant winners, and U has roared back to life after being at a big loss).
Essentially, if the market is acting OK and there is enough time left until a call expires (huge factor), or if there continues to be call buying in that stock, I tend to stick in a position even if the trade has gone against us in the short term.
Open Positions
Robinhood (HOOD) January 15 Call – HOOD had a great week as the stock rallied 15%. This was a positive development for our position that is now at a potential profit of approximately 190%.
Hewlett Packard (HPE) January 22 Calls – HPE gained 2% last week which is “OK,” but in reality, we need this stock to really ramp higher for our calls to regain much of their value. I will likely be looking to exit this trade on any meaningful stock rise.
Lyft (LYFT) October 13 Covered Call – LYFT gained 2.5% last week, which is fine, as the October 13 call that we sold continues to lose value (good).
Marijuana ETF (MSOS) September 9 Covered Call – The MSOS rose modestly last week, which is fine for our covered call trade that continues to decay away (good) and will expire in two weeks.
On Holding (ONON) January 42.5 Calls – ONON gained another 8.5% last week and is now trading at a new 52-week high. Our calls are at a potential profit of 40%.
Oracle (ORCL) March 160 Calls – On Thursday of last week we added ORCL to the portfolio, and quickly locked in a gain of 24% on the first third of our trade on Friday. More on ORCL above in “Stocks on Watch”.
Palantir (PLTR) January 26 Calls – PLTR gained another 9% last week and closed at a new 52-week high. Our calls are now at a potential profit of approximately 135%.
Also of note, on Tuesday Bank of America upped their price target on PLTR shares from 30 to 50, and on Friday a trader bought 1,000 Palantir (PLTR) December 49 Calls for $0.72 – Stock at 35.8.
Nasdaq ETF (QQQ) November 430 Puts – The Fed meeting Wednesday and the presidential election are the two main “worries” for the market before our puts expire. Let’s hope this insurance policy does not pay off.
Rocket (RKT) March 20 Calls – This is the position in our portfolio that I believe will move most aggressively on the Fed announcement on Wednesday, as an interest rate cut of 50 basis points will likely be a boon for housing and RKT. Conversely, it’s possible that RKT could sell off if the Fed only cuts 25 basis points. But that is pure speculation.
Of note, option activity was very bullish in RKT Thursday and Friday as the stock rallied, including these call buys:
Thursday - Buyer of 6,000 Rocket (RKT) September 19 Calls for $0.45 – Stock at 18.9
Friday - Buyer of 5,000 Rocket (RKT) September 20 Calls for $0.60 – Stock at 20
Friday - Buyer of 2,500 Rocket (RKT) March 25 Calls for $1.55 – Stock at 20.
Unity Software (U) December 18 Calls – Welcome back to the party, U! The stock rallied 24% last week on a shift in the company’s pricing strategy, and has been the case for weeks, option activity was red hot into this announcement, and afterwards as well. Our calls are now back in positive territory.
IF you are interested in this news, below are a couple Wall Street notes following this announcement from Unity:
Walmart (WMT) January 65 Calls – WMT added ANOTHER 5% last week as the stock continues to make new highs week after week. Our calls are now at an approximate profit of 290%.
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