September 12, 2024
Trades That Make No Sense
As I track unusual option activity all day there are times when trades are made by hedge funds and institutions that I flat-out can’t understand. And in the last two days, there was such odd call buying in Unity Software (U). Here are those trades, and then my thoughts:
Wednesday - Buyer of 3,000 Unity Software (U) January 65 Calls (exp. 2026) for $0.28 – Stock at 17.2
Tuesday - Buyer of 5,000 Unity Software (U) January 65 Calls (exp. 2026) for $0.24 – Stock at 17
I don’t like these trades for several reasons …
First, the stock would need to rally all the way from 17 to 65 for these calls to finish in the money. Not impossible, but also highly unlikely.
Next, even if the stock were to rally from 17 to 65, I would much rather own January 20 calls (exp. 2026) for $4, as those calls will move MUCH faster if the stock were to move higher.
Third, if this trader were playing a potential takeover, even if U were to be bought out at 30 or 40, those January 65 calls would still expire worthless.
Literally the only reason I can think a trader would want to own these calls that are so far out of the money is they want to buy cheap calls for $0.26, and then potentially sell them for $0.50 - $0.75 down the line … but even that would require the stock to move to 25 or above (approximately).
I just don’t get it; but as an owner of U calls, I hope they are right.
September 10, 2024
Stock on Watch – Oracle (ORCL)
Ahead of the “big” inflation report tomorrow morning, the market has been up, but mostly quiet yesterday and today. This is the case with option activity as well. Essentially, we are in wait-and-see mode for tomorrow’s CPI report.
Not quiet this morning is Oracle (ORCL) which is trading higher by 13% following a blowout earnings report last night. As I’ve noted in the past, I’m always intrigued by a really big move higher in a mega-cap stock which typically doesn’t make such dramatic moves.
Also, into this big stock spike, option activity is fairly bullish in ORCL looking for higher prices in the months to come, including this trade made this morning:
Buyer of 6,000 Oracle (ORCL) November 160 Calls for $5.60 – Stock at 157
Should the market react well to the inflation data tomorrow, and ORCL option activity and stock performance continue to impress, we could add ORCL to the portfolio in the not so distant future.
September 9, 2024
Weekly Update
Led by an awful week for the Semiconductors (down 11%), the S&P 500 fell 3.62% last week, while the Dow lost 2.42%, and the Nasdaq dropped another 5.5%.
Stocks on Watch
There is no question last week was a tough week for the market as the Semiconductors and AI-related plays came under intense pressure. And on Friday, as these stocks were making fresh weekly lows, put buying accelerated in two of the leaders from that group. Here are those trades:
Friday - Buyer of 2,200 Super Micro Computer (SMCI) October 200 Puts for $2 – Stock at 388
Friday - Buyer of 20,000 Advanced Micro Devices (AMD) December 105 Puts for $3.90 – Stock at 133.
SMCI has been a total train wreck in the last six months, having fallen from a high above 1,200 to a low Friday at 385. Yikes! And the put buyer above is looking for a much worse decline by October expiration (I somewhat doubt that put will finish in-the-money, but you never know.)
AMD does not look great, that is for sure, as the stock has fallen from a high of 225 to 134, though in fairness to AMD this decline has been mostly slow and steady as opposed to SMCI’s meltdown. That being said, this size put buyer of December puts is something to keep an eye on.
And while the put buys above are “concerning” I would note there were several big premium call buys in other market leaders on Friday even as the market was under pressure, including:
Buyer of 20,000 Tesla (TSLA) December 240 Calls for $20.35 – Stock at 220
Buyer of 1,300 Taiwan Semiconductor (TSM) October 165 Calls for $7.25 – Stock at 159
Buyer of 5,000 Palantir (PLTR) February 35 Calls for $3.10 – Stock at 30.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 22, which is above the “yellow flag” 20 level, though interestingly is well below the wild spike higher for the “fear index” from last month. Essentially, risk/fear is rising, but is not going nuclear … for now.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Tuesday – 5
Wednesday – 5
Thursday - 5
Friday – 5
Events for the Week to Come
As we get closer and closer to the much-anticipated September Federal Reserve meeting, every economic data point will be under scrutiny. This leads us to two inflation data points this week via the Consumer Price Index (CPI) on Wednesday and Producer Price Index (PPI) on Thursday. Also in focus this week will be the European Central Bank’s (ECB) meeting on Thursday.
And while earnings season has slowed down significantly, traders will be watching for results this week from Oracle (ORCL) on Monday and Adobe (ADBE) on Thursday.
What Traders are Saying
Reading option order flow can work both on the bullish side of the coin as well as the bearish. Here are two examples of each from last week.
I have to admit, I was becoming a touch concerned with our Palantir (PLTR) position last week as Semiconductors and AI plays were under intense pressure. However, this call buying below was certainly comforting ahead of what turned out to be big news that popped the stock on Friday after the close (more on that below):
Friday - Buyer of 5,000 Palantir (PLTR) February 35 Calls for $3.10 – Stock at 30
Wednesday - Buyer of 5,000 Palantir (PLTR) October 29 Calls for $3.20 – Stock at 30.75
Tuesday - Buyer of 7,500 Palantir (PLTR) January 35 Calls for $2.65 – Stock at 31.25.
So what was that big news that may have been the catalyst for the big call buying last week? After the close Friday it was announced that Palantir (PLTR) would join the S&P 500, which means investors who build portfolios to track the S&P 500 must buy PLTR in the coming weeks.
In reaction to this news, PLTR is trading higher by 7% this morning ahead of the market open.
Moving on to the bearish side …
Last Thursday a trader bought the put position below looking for further declines in Mobileye (MBLY) shares which were already down 70% this year:
Thursday - Buyer of 30,000 Mobileye (MBLY) January 12 Puts for $1.60 – Stock at 13.5.
And what was the news this trader was playing?
That afternoon, Bloomberg reported that Intel (INTC) was considering selling its stake in Mobileye, and in the report it was speculated that Intel might unload some, or even all, of its 88% holding in Mobileye. MBLY fell 9% on this news Friday.
Stepping back, I’ve found over the years that following bullish option activity tends to lead to the best results, as typically the market goes up and takeovers and upgrades usually attract some call buying ahead of the announcements. That being said, there is a place for chasing bearish option activity, especially if the market is weak.
Open Positions
Robinhood (HOOD) January 15 Call – Not surprisingly with the market under pressure, HOOD gave up some ground last week, though it was hardly a disaster. Of note, option activity remains very bullish in HOOD options.
Hewlett Packard (HPE) January 22 Calls – HPE fell on earnings on Thursday which is NOT what we wanted. I will likely be looking to exit this position on any stock rebound, so that I can move this capital into a fresher idea.
Lyft (LYFT) October 13 Covered Call – LYFT mostly traded sideways again last week which is totally good for our covered call trade that continues to decay away.
Marijuana ETF (MSOS) September 9 Covered Call – MSOS rallied a bit last week though it mostly remains range bound which is great for our September 9 covered call that is likely headed to expiring worthless (good).
On Holding (ONON) January 42.5 Calls – ONON gave up some ground last week though it continues to look great compared to the overall market and its retail peers.
Palantir (PLTR) January 26 Calls – “Big” news in “What Traders are Saying” above.
Nasdaq ETF (QQQ) November 430 Puts – Here we go again with a steep market sell-off which is why we continue to hold our back-pocket hedge just in case things go really sideways.
Rocket (RKT) March 20 Calls – RKT broke out to a new high since we entered our position on Wednesday and Thursday, before the market selling pressure finally hit the stock. Big picture, I think RKT looks great and the falling interest rate situation should be a big win for RKT stock.
Unity Software (U) December 18 Calls – U raced to a recent high on Tuesday and then looked good again on Thursday before the market got walloped on Friday, which weighed on U shares. Interestingly, call buying in U never stops.
Walmart (WMT) January 65 Calls – WMT continues to be rock solid no matter what the market is doing. Though because I’m slightly concerned about the way the market has been trading, I set a mental stop on our calls at $10 in order to protect our big gains.
Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.
