Follow the volume

06/05/19
  • There was unusually high call options volume in MOH yesterday
  • Stock has approached record highs—and resistance
  • Recent rally has inflated call options premium

The first thing most people probably think when they see a 4,122% increase in call options volume is, “Whoa, why do people want this stock?” That was the position health insurer Molina Healthcare (MOH) found itself in yesterday, as shown in the following LiveAction scan:

LiveAction scan: Unusual Call Volume, 6/4/19. Unusual options activity. MOH tops call options volume scan

Source: Power E*TRADE


Those numbers also put MOH near the top of the list of tickers with the highest call/put ratios.

The bull paws the dust, waves its horns, snorts, and charges off…

As you sometimes have to say in these situations, not so fast. First, the vast majority of that call volume surge (around 14,200 contracts at noon ET) was split evenly between the September $150 calls and the December $160 calls. The kicker is that the total open interest (the number of unclosed options positions) in those two contracts was less than 200. Translation: A lot of that volume likely consisted of a trader (or traders) closing out positions rather than establishing new ones.

Now, if that makes the scenario sound much less bullish, there’s no doubt MOH has been on a roll lately, rallying nearly 4% yesterday, nearly 15% in the past few days, and around 29% since April 17:

Molina Healthcare (MOH), 8/6/18–6/4/19. Molina Healthcare (MOH) price chart. Recent upsurge reached resistance.

Source: Power E*TRADE


The chart also shows that since the stock hit an all-time high around $154 last September, it’s pulled back more than 30% (to around $105), then rebounded to $145-$150—retreating three times from that level, in February, March, and April. That’s the same resistance level shares hit this week.

Regardless of whether MOH is a good longer-term buy (the average 12-month analyst price target is around $175, by the way1), the stock’s recent surge to an established resistance level could be prompting some longs who have enjoyed the ride to take profits on their positions—and tempting some traders to nibble at the short side in the expectation of a short-term cool-down.

For options traders, one choice would be to short out-of-the-money calls (those with strike prices above the current stock price), possibly those with three weeks or less remaining before expiration, such as the $160 calls expiring on June 21:

Profit-loss profile: Short June $160 MOH calls. Option ris-rward. Using options for pullback play

Source: Power E*TRADE


This trade’s risk is the same as a short-stock position, although its profit is limited to the premium collected from selling the calls. If the stock is at or below the strike price at expiration, the trader keeps the premium.

The reason some short traders may be looking at this type of position—other than the greater leverage offered by options—is that MOH’s recent surge has pumped up call options prices just as the June options are entering the time window (the final two or three weeks before expiration) when they tend to lose value at an accelerated rate.

That means traders would potentially be selling these options at relatively high levels at a time when they will be fighting to hold on to their value—every day that passes reduces the chance that the stock will be above $160 by June 21.

Even when a big print on the ticker turns out to be something other than what you thought, it can still open the door to interesting possibilities.

Market Mover Update: Semiconductor stocks responded to a day free of trade-war friction with strong gains. Yesterday the PHLX Semiconductor Index (SOX) rallied more than 3.5% intraday, while Advanced Micro Devices (AMD) jumped nearly 6% and Intel (INTC) gained close to 2.75% (see “Sector reaches key level”).

All the stocks targeted in Monday’s tech antitrust bombshell—Apple (AAPL), Alphabet (GOOGL), Facebook (FB), and Amazon (AMZN)—jumped back into the plus column yesterday.

Today’s numbers (all times ET): ADP Employment Report (8:15 a.m.), PMI Services Index (9:45 a.m.), ISM Non-Manufacturing Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).

Today’s earnings include: American Eagle (AEO), Campbell Soup (CPB), G-III Apparel (GIII), Cloudera (CLDR), Five Below (FIVE), MongoDB (MDB), Smartsheet (SMAR), Stitch Fix (SFIX).

 

Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.


1 TipRanks. MOH Molina Healthcare Inc. 6/4/19.

What to read next...

06/04/19
A semiconductor barometer has paused near a potential inflection point.

06/03/19
May went out the same way it came in—like a bear.

05/31/19
Exchange stocks pump up the volume, and the VIX signals less fear on the market’s most recent dip.

Looking to expand your financial knowledge?