Market Update for the Week Ahead
Welcome back to The Juice for your weekly options breakdown and market update.
What happened last week?
The good news is that the highly anticipated FOMC meeting on Wednesday offered the market a sense of stability. The bad news is that the positive sentiment lasted only a few hours as stocks ripped higher into the close on Wednesday only to be bludgeoned on Thursday and going into Friday morning. Luckily, Friday’s session that started off as looking like most Twitter Gurus would be making another deposit into their trading account ended the day a bit higher with some stocks finishing in the green.
What did we learn from the FOMC meeting and JPOW’s subsequent comments? Nothing new, really, but here’s a quick breakdown.
In summary, the Fed are feeling inflationary pressures and may be required to raise rates and end Quantitative Easing (QE), but they want to do so in a way that won’t affect the markets… so is this bullish or bearish? In my opinion, it’s tough to interpret what will happen as there is still quite a bit of uncertainty that revolves around exactly how “transitory” this inflation is and when these pressures will ease.
Markets - Option Flows
Last Friday we experienced what is known as quadruple witching day. Quad witching is a phenomenon where the volume of options expiring increases significantly relative to most other weeks, and thus volatility usually increases as well. During the quad witching you have all sorts of contracts expiring from single stock futures and stock options that include weeklies, monthlies, and quarterly contracts. Essentially many different financial assets are all expiring on the same day and this happens four times a year.
As expected for a witching day, Tesla’s option flow was pretty muted compared to SPX and SPY options. Here’s a visual to see just how much premium in SPX was traded on Friday:
Markets Overview - ETFs
What about the top sector ETFs? Energy and financials were leading the pack, with SMH, a semi-conductor ETF, coming in third of most premium being traded. Many industries have taken a beating in the last several weeks so keep an eye on which areas players may be setting up to take advantage of the next move. Mega-cap tech stocks have been the most resilient and still currently trade near the highs while many other names are down 10-40%.
Short Interest Stocks
Following up from our sector ETFs outlook is another asset class I want to touch on today, the “Short Interest” category. AMC and GME, who both opened in the red on Friday, saw extremely bullish options flow come through by mid-day and into the close. Here’s a list of short interest stocks and their respective option flow from Friday:
AMC was the number one short-interest name and by a large margin. It’s interesting to see a stock have an over 20% intraday swing from the lows to the high, and this amount of option flow and price action will surely change the Gamma Exposure (GEX) pressures. Let’s go through some of the biggest bullish call option activity from Friday’s tape.
We’ve filtered to see the calls at the ASK that pushed the stock higher for the day. We see several $100k bets rolling through with early 2022 expirations. Further down the list we are seeing trades with March-June expirations and a bit more of a long-term outlook. AMC share price has been in a downtrend since June and was down more than 60% from the highs going into Friday’s trading session.
Outside of option flow I always like to check out the GEX charts to see where buying pressures may subside on the way up. Let’s dive into AMC’s GEX chart.
Typically, we have seen either buying or selling pressure cool off when share price hit’s the largest green or red bar from the chart. This may explain why AMC’s share price bottomed in the $25-20 range before seeing Friday’s big bounce. From the chart the biggest area to keep an eye on will be the bullish GEX at the $40 level. Seeing rather large buying/selling pressure on both the PUT and CALL side may have the stock teeter-totting in both directions while reinforcing this high volatility. This is not unusual for an already volatile stock like AMC.
There’s so much data on the VIG platform that we could spend hours sifting through it all. We wanted to see which plays were pumping the financials and energy sector with bullish option flow so we took a gander at Friday’s “ETFs Only: Money Printer Calls”. As expected the top of the list was filled with XLE and XLF plays. Many of them expiring end of January, are players looking for this short-term dip to get bought up?
Matrix Scan - Heating Up Calls
Another scan to keep an eye on is the “Heating Up Calls” which is filled with names almost we like to peruse this list and see what were the big options plays for the day and how far out are they expiring. Shorter-term expirations may be a momentum play or a hedge versus something expiring further out where a player could be building a position. What caught our attention were the following:
Roblox (RBLX): 2,300 calls at the $110 strike and January, 2022 expiration. These were running at 500% of the 10-day average. Roblox is down 25% in just the last month and is hitting oversold indicators.
Other names such as Palantir (PLTR), Upstart (UPST), and AMD which have all been dragged down with the market weakness. As mentioned with the start of the letter and how the market seems to be focusing on inflationary pressures, interest rates, and covid, there is a lot of uncertainty. Checking in on these scans can show which stocks are getting hit with bullish option flow and large directional bets.
The market may be in a peculiar place with a lot of names getting hammered. It’s always good to remember stocks don’t usually go down forever and it’s best to be prepared for when the tide finally does turn, and for the better.
We hope everyone has a great trading week! Make sure to check out our Fantasy Stock Games this week as we start another full week of Games built around the Christmas Holiday Season! Enter for free to any of our numerous contests this week and show your stock and crypto pick 'em skills!