Keep your eye on the ball

05/02/19
  • Sharp increase in FOCS options activity yesterday
  • The stock has been consolidating for the past month
  • Next earnings release scheduled for May 20

Trading ranges are sort of like extra-inning baseball games: They can seem to go on forever, but they often end suddenly with one swing of the bat.

Financial services firm Focus Financial Partners (FOCS) may not be in the 17th inning of its current consolidation, but it’s nonetheless in its lengthiest congestion since last September, just weeks after it began trading publicly. After bouncing off its March low around $31.50, FOCS has been trading mostly between $35.50–$38 since early April, around $11–$14 below its record highs above $49:

Focus Financial Partners (FOCS), 7/26/18–5/1/19. Focus Financial Partners (FOCS) price chart. Trading range, range-bound stock.

Source: Power E*TRADE


That type of price action, along with relatively low daily volume of around 220,000 shares, would probably cause most active traders to yawn and move on to another ticker, but those who were keeping an eye on options activity yesterday would have spied something out of the ordinary.

The Power E*TRADE LiveAction scan below shows open interest (OI) in FOCS options was more than six times its average yesterday:

LiveAction scan: Unusual open interest, 5/1/19. Stocks with high options open interest. Unusual options activity. FOCS open interest more than six times average

Source: Power E*TRADE


Because open interest represents the number of unclosed options trades, the bump in OI meant more traders were taking positions in FOCS. Although it’s impossible to decipher the intentions of those traders from just one number, increasing options activity in a range-bound stock can be a signal that some traders expect a stock to bust out of that range.

In terms of when that may happen, traders may be considering a few factors.

First, in terms of catalysts that could jumpstart price action, one should always consider earnings. FOCS has only one quarterly report under its belt—February 21, which topped estimates1—with another one currently scheduled for May 20. There’s no reason something unexpected couldn’t pop up between now and then, but the upcoming earnings release will likely loom large in the eyes of many traders watching the stock.

Waiting is an unavoidable part of trading, but traders who keep their eye on the ball during quiet periods may be rewarded when price action ramps up.

Then there’s the broader market context—FOCS isn’t trading in a vacuum, after all. It’s a small-cap financial stock, and the financial sector has trailed only tech among S&P 500 (SPX) sectors over the past month. Another potential source of momentum may come from the recent uptick in small cap stocks: After lagging the other US indexes in March and much of April, the Russell 2000 (RUT) has shown renewed signs of life over the past week or so.

Waiting is often an unavoidable part of trading—a fact of life illustrated by a recent situation with parallels to FOCS. Yelp (YELP), which has rallied more than 12% since breaking out of a tight consolidation on April 22, made its real move a week after a potential breakout was noted in “Two sides of the breakout.”

Traders who fall asleep when the game is boring run the risk of missing what could turn out to be the play of the week.

Market Mover Update: Alphabet (GOOGL) traded below Monday’s low yesterday, per the pattern outlined in “Trading beyond the headlines.”

Today’s numbers (all times ET): Productivity and Costs (8:30 a.m.), Factory Orders (10 a.m.), EIA Natural Gas Report (10:30 a.m.), Motor Vehicle Sales.

Today’s earnings include: Abiomed (ABMD), DowDuPont (DWDP), Dunkin (DNKN), Kellogg (K), Royal Dutch Shell (RDS.A), SAGE Therapeutics (SAGE), Worldpay (WP), Activision Blizzard (ATVI), Arista Networks (ANET), Gilead Sciences (GILD), GoDaddy (GDDY), Motorola Solutions (MSI), ResMed (RMD), U.S. Steel (X), Intel (INTC), iQIYI (IQ), Juniper Networks (JNPR), Mattel (MAT), Starbucks (SBUX).

 

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1 StreetInsider.com. Focus Financial Partners Inc. (FOCS) Earnings. 5/1/19.

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