Options liquidation

12/01/20
  • Ross Stores (ROST) call volume jumped Monday
  • Off-price retailer surged after Nov. 9 vaccine news
  • Options “close-out” highlights potential downside targets

When discount retailer Ross Stores (ROST) appeared on yesterday’s LiveAction scan for unusual call volume, it was worth a deeper look—and not just because the retail sector has been in the spotlight amid a flood of recent earnings and the arrival of the holiday shopping season:

Chart 1: LiveAction scan: Unusual call volume, 11/30/20. Unusual options activity. ROSS call volume.

Source: Power E*TRADE


ROST was also one of the symbols on the list that was down on the day—nearly 3% in early trading, although it later pared its losses. There’s no rule that says a stock has to rally when it has exceptionally high call volume—an attractive stock pullback can entice bulls to buy calls, after all—but it’s always interesting to find out why people may be piling into calls.

Well, in this case, they weren’t. With ROST trading below $108.50 all yesterday morning, almost all of its call volume was in two contracts—the February $110 and $130 calls, which traded 2,100 contracts each.

Those are pretty big positions, especially for ROST, but the options chain below shows traders weren’t putting new positions on, they were mostly getting out of existing ones. How do we know that? Because the open interest (OI) in the $110 calls was only 57 contracts and the OI in the $130 calls was only 26 contracts:

Chart 2: Ross Stores (ROST) Feb. call options, 11/30/20. Ross Stores (ROST) options chain. Big call position liquidation.

Source: Power E*TRADE


If that means a large trader (or traders) decided to pull the plug on a bet that ROST would continue to extend its upswing over the next several weeks, the stock’s recent price action may help explain why.

ROST’s price chart highlights the dynamics that appeared to be at work in many retail stocks, especially those, like ROST, that depend significantly on brick-and-mortar traffic. The stock, which had trouble gaining traction after its initial rally off the March lows, jumped after news of COVID vaccine successes this month (the November 9 Pfizer-BioNTech vaccine announcement being the first, and having the most evident market impact):

Chart 3: Ross Stores (ROST), 2/20/20–11/30/20. Ross Stores (ROST) price chart. Pause after vaccine surge.

Source: Power E*TRADE


ROST broke out of a two-month trading range on November 9—gapping higher and tagging an eight-month high—but has since failed to push to a higher high, despite topping earnings estimates on November 19,1 as spiking infection rates and renewed lockdowns have cast some doubt on the near-term viability of the retail rebound.

That’s the industry “narrative.” In terms of price action, many traders would look at a chart like this and consider the possibility of an emotionally driven price jump retreating to test recent technical milestones—in this case, the breakout point of the August–November trading range (around $100) or the bottom of the November 6-9 price gap (around $95) may loom large on their trading screens.

Market Mover Update: Speaking of gaps, in the two months since Intel (INTC) tested its longstanding support level around $43.50, the stock has rallied a modest 9% (essentially keeping pace with the Nasdaq 100). But the fact that it’s held its ground for this long may have some technical traders thinking it could take a stab at closing at least some of its big October 22–23 down gap, in which case the type of call spread discussed in “Chipmaker entering the zone?” may again come into focus.

The market padded its Thanksgiving-pattern resume by pulling back the Monday after the holiday for the 15th time in the past 19 years, and the Nasdaq 100 (NDX) and Russell 2000 (RUT) kicked off the week by reversing their recent relative-strength roles (see “Taking stock of a record November”).

Today’s numbers (all times ET): PMI Manufacturing Final (9:45 a.m.), ISM Manufacturing Index (10 a.m.), Construction Spending (10 a.m.), Jerome Powell Senate Banking Committee testimony (10 a.m.).

Today’s earnings include: Box (BOX), Momo (MOMO), NetApp (NTAP), Salesforce.com (CRM).

 

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1 StreetInsider.com. Ross Stores (ROST) Tops Q3 EPS by 4c, Revenues Beat. 11/19/20.

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