Fuel for the fire?

01/14/20
  • PBH rebounded yesterday after four-day pullback
  • Stock rallied strongly in 2019 after 2017–2018 correction
  • High PBH options OI and volatility yesterday

Options traders aren’t infallible, but when they're active, stock traders should take note.

That works the other way, too.

Prestige Consumer Healthcare (PBH), purveyors of over-the-counter health products (Dramamine, Chloraseptic…and parents, perhaps you’re familiar with the company’s Boudreax’s Butt Paste diaper rash ointment?) broke a four-day losing streak yesterday with a 2%-plus rally:

Chart 1: LiveAction scan: Unusual open interest, 1/13/20. Unusual options activity. More than 5x average OI.

Source: Power E*TRADE


PBH gained around 29% in 2019—not bad, considering healthcare was the second-worst S&P sector of the year. That rally was also a welcome change of pace for long-term PBH investors, who watched share prices get more than cut in half between April 2017’s all-time high near $60 and January 2019’s lows around $28.

The recent pullback dropped prices a little more than 6% from their late-December highs above $41—the stock’s highest level since November 2018 (and current resistance level). Was Monday’s volatile rebound (the stock traded much higher early in the session, pulled back to nearly breakeven, then rallied again) a signal that short-term bulls were back in the fold? Traders who looked under the hood of the price action may have noticed a couple of other interesting developments yesterday.

First, open interest (OI) in PBH options was running more than five times the average rate in early trading:

Chart 2: Prestige Consumer Healthcare (PBH), 10/17/19–1/13/20. Prestige Consumer Healthcare (PBH) price chart. Pullback from recent highs.

Source: Power E*TRADE


Because open interest represents the number of unclosed options trades, high/growing OI means more traders are throwing their hats in the ring, so to speak—potential fuel for a price move.

Second, PBH option implied volatility (IV) was higher than average yesterday—another sign that market participants may be expecting movement in the stock. Implied volatility is the part of an option’s price that reflects how much traders expect it to move in the future—the higher the IV, the higher the expected volatility (and, of course, the higher an option’s premium).

Yesterday’s rally was pretty robust, but if PBH’s OI and IV levels are, in fact, signaling there’s more gas left in the tank, traders may be looking for more action in the stock before it releases earnings next month.

Market Mover Update: Yesterday’s fresh all-time highs for the S&P 500 (SPX) and Nasdaq 100 (NDX) occurred amid reports that the US will remove the “currency manipulator” tag it laid on China last August.1

Today’s numbers (all times ET): Consumer Price Index (CPI), 8:30 a.m.

Today’s earnings include: Delta Airlines (DAL), Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), Kinder Morgan (KMI).

 

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The New York Times. Treasury to No Longer Designate China as Currency Manipulator. 1/13/20.

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