Rangebound stock, options on the move

  • TNET pulled back 26% after 49% Aug.-Nov. 2021 rally
  • Stock has consolidated since hitting late-Jan. lows
  • Open options positions more than 36 times avg.

Many traders like to look for consolidations in traditionally volatile (i.e., momentum) stocks. The idea is that volatility will eventually return, setting up a potential breakout trade.

Traders also frequently dig into options activity to see if there’s any evidence of shifting sentiment or momentum that may not be apparent in the stock itself.

Those two concepts recently intersected in TriNet Group (TNET). The human resources, payroll, and employee benefits provider has consolidated for several weeks since giving back most of its August–November rally and bouncing off its late-January lows:

Chart 1: TriNet Group (TNET), 7/14/21–3/10/22. TriNet Group (TNET) price chart. Sell-off, bounce, consolidation.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Two other items of interest from the chart:

1. Although TNET began underperformed the S&P 500 (SPX) in November, the stock has outperformed the SPX (blue line) over the past six weeks. TNET is a small-cap stock—a group that has generally led the broad market in recent weeks after months of lagging it.

2. TNET’s implied volatility (IV) has mostly been above its historical volatility (HV) since last July. More recently, though, IV fell below HV, suggesting the options market was anticipating less volatility in the near future than the stock’s price action has delivered in the recent past.

Declining IV during a price consolidation isn’t necessarily unusual. After all, if a stock moves sideways for a while, the market will often project that behavior into the future, right or wrong. But TNET has also had a fair amount of unusual options activity recently, including high open interest (OI):

Chart 2: LiveAction scan: Unusual open interest. Unusual options activity. OI 36 times avg.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Yesterday there were nearly 30,000 open TNET options positions, compared to an average of 826. The options chain showed 26,800 of those positions were split evenly between the April $120 calls and April $120 puts:

Chart 3: TNET April options, 3/10/22. TriNet Group (TNET) options chain. Matching positions in $120 calls and puts.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Equal-sized positions in calls and puts with the same strike price and expiration date will make many people think “straddle,” a price-neutral options spread intended to take advantage of an increase or decrease in volatility, depending on whether a trader goes long or short.

In a long straddle, the trader buys the call and put, with the strike price typically near the current stock price. If the stock moves enough, up or down, to offset the combined cost of the options, the position can profit. The short straddle trader sells both options, collects the premium, and hopes for as little stock movement as possible, in which case both options will likely lose value and one or both can be covered at profit.

The twist in this case is that TNET has never traded above $109.40, the all-time high it hit in November. Yesterday morning the stock was trading around $86. Even if the options position had been initiated just as the stock was peaking, the strike price wasn’t that close to the stock. But there was notable trading just this week: On Monday morning, OI in the $120 call and puts was less than 11,000 each, and TNET landed on the LiveAction scans for unusual call and put volume.

When a stock isn’t moving but its options are, traders often take notice. Even when it’s difficult to decipher the intent of large options positions, unusual activity can be a heads-up to watch for other developments that may help fill in the picture.

Today’s numbers include (all times ET): Consumer Sentiment (10 a.m.).

Today’s earnings include: Futu (FUTU).


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