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China Better Watch Out, the Option Market is Coming for You

Posted: 18 May 2020 04:30 AM PDT

The rhetoric is heating up between the U.S. and China over the virus, Huawei, renegotiating the Phase 1 trade deal, and the halting of U.S. pension investment in Chinese companies. As all the news is swirling around and the potential impact on publicly traded Asian companies and Chinese companies, in particular, could be big. Wilbur Ross, U.S. Commerce Secretary, was quoted by Reuters regarding Huawei as saying, "there has been a very highly technical loophole through which Huawei has been in able, in effect, to use U.S. technology with foreign fab producers."

The upside of shorting Chinese stocks could be huge, but so are the risks. This is where options can provide a limited risk and high reward opportunity if your projections are correct. On Friday, the option volume wasn't all that significant on the iShares China Large-Cap ETF (FXI). However, there was a rather large bearish option trade that was placed on the ETF. This is one of several large bearish trades placed on FXI in the past couple weeks.

The trade that was made was a long vertical spread for on the 29 MAY 20 37.50/33.50 put options. There were 7,500 contracts traded at a cost of around $0.60. The trade involves buying the $37.50 and selling the 33.50 put at the same time. The maximum gain of $340 a contract is established if the price closes below $33.50 at expiration. The use of the $33.50 strike matches the support in mid-March.

Action to Take: The near-term target is $33.50. Speculators may consider setting up a similar trade using the June options. For example, the 19 JUN 20 39/37 long put vertical can be bought for around $0.95 or less. The max gain of $105 or 110% ROR is achieved if the price closes below $378 at expiration. Consider closing early for $1.60 or more.

This Company Claims the Prize for Insider Selling for Last Week

Posted: 18 May 2020 04:30 AM PDT

YETI Holdings, Inc (YETI) is a designer, marketer and distributor of products for the outdoor and recreation market. You may have or have likely seen their product line of coolers and other products.

Last week, the company announced a secondary offering of 15 million shares priced at $28.20 a share. The offering was expected to have closed last week as well. The desire to raise capital came after the company posted earnings that beat analyst estimates. The company has beaten estimates for four quarters in a row.

Based on insider trading data available for last week, YETI led optionable companies with over $384.26 million in insider trading value. The 13.7 million shares that were sold by insiders were spread over two transactions. The next closest company was Virtu Financial Inc (VIRT) at $127.3 million in value on 5.5 million shares.

The bulk of the shares were sold by Cortec Group, a 10% owner in YETI, that sold 12.75 million of the 18.36 million shares they were holding. Nearly 1 million shares were sold by Roy Seiders, director, which represented around 18.5% of his holdings.

Action to Take: YETI is a short opportunity on a close below $24.50 on above average volume. The near-term target following the breakout is $17.50.

Speculators may consider the 17 JUL 20 $25 put for around $1.90. If the price falls to $17.50 by expiration, the option will be worth $7.50. Consider closing half the position if the price doubles.

5 Retail Trade Companies Having a Breakout Week

Posted: 18 May 2020 04:30 AM PDT

The S&P 500 has finished lower in three of the last four weeks, with last week's performance being on the weakest since the week of MARCH 30 and the biggest intraweek losses since the week of March 16. The lack of traction in the market may be concerning to some but is typical in trends that you will take a hiatus. Ultimately, the economic data is creating concern over where this is a pause that refreshes or the pause that leads to a reversal.

The weakness in the broader market isn't necessarily being felt in all industries and certainly not in every stock. For the week, Health Services posted the best weekly performance at 1.73%, followed by Health Technology at 0.98% and Retail Trade at 0.89%. From there, all other larger industry group categories were lower on the week. Of the 129 sub-industries available, only 18 posted a positive weekly performance.

Within Retail Trade, there was a common thread between many of the top performers on the week. That common thread is that they all had high short interest. Also, for many of them they saw unusual option activity at some point in the past few weeks. Short interest is when shares of a company are borrowed and sold at the current price, with the intent buy back the shares at some point. What we're experiencing right now with many of these stocks is what's called a short squeeze. The squeeze happens as shorts rush to cover quickly, which causes the stock price to rise dramatically.

The following list of five companies were among the top performers in the one of the top industries that all have high short interest.

Retail Trade Stock #1: Pinduoduo Inc (PDD)

PDD operates an e-commerce platform in the People’s Republic of China and closed over 11% higher on the week. PDD experienced unusual call option buying activity on May 5.

The company has over 37 million shares shorted with a float of 388.07 million. That means the nearly 10% of the float is shorted with a short ratio of 5.56 days. The short ration takes the average volume and divides it by the number of shares in the float. The higher the short ratio, the greater number of days of volume to cover the short interest and thus a high potential impact on the price.

PDD experienced unusual call option buying activity on May 5.

PDD has earnings coming up on May 22 before the market open. The potential near-term target for PDD is $70.

Retail Trade Stock #2: Revolve Group, Inc (RVLV)

RVLV is fashion accessories retailing company. The Company provides an online platform, which offers over 45,000 apparel, footwear, accessories and beauty style products from more than 500 emerging, established and owned brands.

The company has 6.89 million shares short as of April 30 with a float of 15.61 million. That's 44% of the float with a short ratio of 9.93 days.

RVLV has a near-term target of $21.

 

Retail Trade Stock #3: Stitch Fix, Inc (SFIX)

SFIX is an online personalized styling service company. The Company offers apparel, shoes and accessories across categories, brands, product types and price points. SFIX has had 5 days in the last two weeks where it has had unusual call option buying volume.

The company has 22.82 million shares short as of April 30 with a float of 52.97 million. That's 42% of the float with a short ratio of 8.23 days.

SFIX has earnings coming up on June 3 after the market closes. The potential near-term target for SFIX is $26.

Retail Trade Stock #4: Camping World Holdings, Inc (CWH)

CWH is a provider of a portfolio of services, protection plans, products and resources for recreational vehicle (RV) enthusiasts. CWH saw a surge in call buying volume on the Jun $21 call on Friday.

The company has 9.75 million shares short as of April 30 with a float of 24.35 million. That's 37% of the float with a short ratio of 5.24 days.

The potential near-term target for CWH is $20.

Retail Trade Stock #5: At Home Group, Inc (HOME)

HOME is a home decor superstore. The Company is focused on providing a range of assortment of products for any room, in any style, for any budget. HOME saw a surge in call option buying last Tuesday May 12.

The company has 12.57 million shares short as of April 30 with a float of 30.7 million. That's 41% of the float with a short ratio of 4.12 days.

HOME has earnings coming up on June 4 after the market closes. The potential near-term target for HOME is $7.
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