A bull in bear’s clothing?

  • As AAP slid, options volume was high—but stock volume wasn’t
  • Options trading may have obscured underlying trading dynamics
  • Stock is around the 50% retracement level of its recent rally

There was a lot of action yesterday in a stock whose ticker begins with “AAP.”

Actually, that’s the whole thing. While many market players were likely thinking about today’s after-market earnings release from Apple (AAPL), some were already very busy in Advance Auto Parts (AAP), which had around 22 times its normal options volume yesterday:

LiveAction scan: Unusual options volume, 4/29/19. Heavy AAP options activity.

Source: Power E*TRADE

And there wasn’t an earnings release in sight: AAP’s next one isn’t due out until late May. Also, scanning the interwebs showed zilch in terms of company news for the auto parts supplier.

Although the options volume was skewed slightly more toward calls than puts, the price chart showed the stock was down more than 1% around mid-session (trading around $168), even though all the major US indexes were up on the day:

Advance Auto Parts (AAP), 11/16/18–4/29/19. Advance Auto Parts (AAP) price chart. Bearish pressure or bullish opportunity?

Source: Power E*TRADE

At first glance, the overall picture may have appeared bearish—shares trading sharply lower on an up day for the market, huge options volume—but as is often the case, initial impressions can be misleading. The volume totals showed most of the action was in two call options just above the current stock price and two put options just below it: the May $170 and $175 calls and the May $160 and $165 puts.

Any possible debate about what such positions may mean (perhaps a large trader putting on a short strangle to take advantage of declining volatility?) was pre-empted by the fact that the data showed more traders appeared to be getting out of these options than into them.

Another bit of information: AAP stock volume was less than 330,000 shares more than halfway through the trading session, which was only around a quarter of its 90-day average.1 So, sure, the AAP was certainly moving yesterday, extending a downswing from the roughly five-month high it made earlier in April, but it was doing so on lighter-than-average volume—a possible sign that although the stock was dropping, there wasn’t a great deal of anxiety about the move.

Because experienced traders know they’re not always going to be right, they try to focus on finding trade scenarios that offer the best reward relative to risk.

What’s more, AAP’s low of $165.87 from last Thursday represented a 50% retracement of the March–April rally—and many technical traders look for stocks to bounce after giving back roughly half of a move. In other words, it’s not out of the question that AAP bulls would be anticipating short-term upside around current levels, and would view yesterday’s sell-off as an opportunity to get in at a favorable level. The caveat is that such traders would also likely interpret a downside breakout (especially on a closing basis) of last Thursday’s low as a signal the stock could challenge support around the level of its December–March lows.

Experienced traders know they’re not always going to be right. Given that reality, they try to concentrate on finding trade scenarios that offer the best reward relative to risk. One of those setups is buying stocks that are very close to recent lows.

Market Mover Update: The S&P 500 (SPX) followed up on last week’s record closes by hitting an all-time intraday high of 2,949.52 yesterday, taking out its former record peak from September 20, 2018.

Another momentum trend from last week that followed through yesterday: The small-cap Russell 2000 (RUT) continued to strengthen.

Today’s numbers (all times ET): FOMC meeting starts, Employment Cost Index (8:30 a.m.), S&P Corelogic Case-Shiller HPI (9 a.m.), Consumer Confidence (10 a.m.), Pending Home Sales Index (10 a.m.).

Today’s earnings include: BP (BP), ConocoPhillips (COP), Eli Lilly (LLY), General Electric (GE), General Motors (GM) MasterCard (MA), McDonald's (MCD), Merck (MRK), Pfizer (PFE), Shopify (SHOP), Advanced Micro (AMD), Apple (AAPL), Exact Sciences (EXAS), Lattice Semi (LSCC), Maxim Integrated (MXIM).


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1 Nasdaq.com. Advance Auto Parts Inc Advance Auto Parts Inc W/I (AAP) Quote & Summary Data. 4/29/19.

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