Cooking up a trade

04/23/20
  • WSM saw heavy call options volume yesterday
  • Stock range-bound after monster rally
  • Company insiders recently bought shares

Sometimes traders can walk a fine line between accounting for all the factors that may affect a trade and succumbing to “analysis paralysis”—getting bogged down in too much information and “what-iffing.”

Upscale kitchenware retailer Williams-Sonoma (WSM) may have had some trader brains working overtime recently, even though the stock has been sitting in a range for the better part of two weeks.

Insider stock purchases don’t guarantee rallies, but some traders monitor them to gauge the confidence executives have in their companies.

If you were a trader pondering WSM’s next move, here’s just a few things you may have been turning over in your mind yesterday:

1. Options volume was high.

2. The stock’s rally off its March low was about three times the size of the S&P 500’s (SPX) rally.

3. A company insider recently made a sizable stock purchase.

4. Is a high-end retailer with no open stores in a good position to thrive in the near future?

Let's tackle the options activity first. The following LiveAction scan shows WSM call options volume was nearly nine times its average level yesterday morning:

Chart 1: LiveAction scan: Unusual call volume. Unusual options activity. Call options volume nearly 9 times average.

Source: Power E*TRADE


With the stock around $51.50–$52 in early trading, most of the options volume was in the May $52.50 and May $57.50 calls (more than 900 contracts of the former and nearly 800 of the latter). Looking at things in terms of the option buyers, one possible interpretation is this could represent traders expecting the stock to make an up move before the options expire in a few weeks.

The following price chart shows that such a move would imply a breakout of the trading range WSM has been in since April 9. Wednesday morning the stock was still down around 26% since the beginning of February—twice as much as the S&P 500 (SPX)—but that was because WSM sold off much harder than the broad market. Since March 18 (the day the company released estimate-topping earnings) the stock has rallied around 70%, more than three times the size of the SPX’s rebound off its March low.

Chart 2: Williams-Sonoma (WSM), 1/31/20–4/22/20. Williams-Sonoma (WSM) price chart. Range-bound after rally.

Source: Power E*TRADE


Too much upside, too soon? Perhaps, but around the time the stock began moving sideways, Williams-Sonoma board director Adrian D.P. Bellamy bought 9,600 shares of his company’s stock, which came a little more than two weeks after another director purchased 10,000 shares.1

While insider buying like this doesn’t guarantee further gains, some traders monitor it to gauge the level of faith executives have in their companies. If nothing else, bullish traders prefer this scenario to seeing insiders dump shares. (Interestingly, stock purchases by corporate insiders hit a 21-year global high in mid-March, just before most indexes bottomed.2)

Finally, while the lockdown has understandably punished brick-and-mortar retailers of all stripes, WSM has long had a strong e-commerce presence, with 56% of revenues coming from online sales in 2019.3

As is always the case—and especially in the current environment—very few stocks can be expected to buck an exceptionally strong move by the broad market, up or down. But traders who get a handle on the specific catalysts that may be driving a particular market have a better chance of spotting potentially overlooked trade opportunities—as long as they keep one eye on the big picture.

Market Mover Update: Constellation Brands (STZ) pivoted to the upside yesterday after breaking below the bottom of its trading range on Tuesday  (see “Bulls, bears, and booze”). Despite the broad-market rally, Teekay Tankers (TNK) traded mostly to the downside yesterday as oil prices rebounded (see “Storage wars”). Netflix (NFLX) sagged yesterday after posting eye-popping user numbers (nearly 16 million new subscribers in Q1) but missing earnings estimates. However, the stock also rallied intraday to close well off its lows (see “Beyond the bounce”).

After appearing to sell-off in sympathy with crude oil on Tuesday—plunging back into its recent trading range—May copper futures (HGK0) got back into bullish gear yesterday, rallying more than 2%.

Today’s numbers (all times ET): Jobless claims (8:30 a.m.), New Home Sales (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Amazon.com (AMZN), Southwest Airlines (LUV), Eli Lilly (LLY), Edwards Lifesciences (EW), Hershey (HSY), Intel (INTC), Cypress Semiconductor (CY), Citrix Systems (CTXS), PulteGroup (PHM), Verisign (VRSN).

 

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1 Nasdaq.com. Williams-Sonoma, Inc. Common Stock (DE) (WSM) Insider Activity. 4/22/20.

2 Bloomberg. Corporate Insiders Send Most Bullish Stock Signal Since ‘99. 4/20/20.

3 Zacks Equity Research. Williams-Sonoma Boosts E-Commerce Business Amid Coronavirus. 4/1/20.

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