Options churn as stock tests resistance

  • IFF up more than 25% since mid-October
  • Options volume increased as stock tested resistance
  • Open interest shows mix of traders getting in, out

While conspicuous events like extreme price moves or big options trades can make what happened immediately before and after them appear to be inconsequential, here’s a reminder of why it’s helpful to monitor markets over time.

On Friday, International Flavors & Fragrances (IFF) was pushing to its highest price since mid-September on a weak day for the broad market, and appearing on the LiveAction scan for unusual call volume, with calls trading at more than 12 times their average pace.

Traders who looked no further than this seemingly bullish snapshot would have been unaware that put volume was more than nine times average. And traders who didn’t dig any deeper than that may have missed some important nuance in all that options activity.

The top half of the following options chain shows Friday’s big call trades were in the December $105 and $110 calls (1,000 and 2,500 contracts, respectively). With IFF closing a little below $108 on Friday, the $105 calls were slightly in the money, while the $110s were a little out of the money. Meanwhile, the major put activity consisted of 1,400 contracts in the December $105 puts (bottom):

Chart 1: International Flavors & Fragrances (IFF) Dec. call options, 12/2/22. IFF options chain. More calls than puts, but more “new” puts.

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

With more than twice as many calls trading as puts, some traders may have viewed this activity as more bullish than bearish. But others would have noticed that the $105 calls had open interest (OI) of 9,800 contracts, which means some or all of Friday’s volume could have been traders getting out of the market.

Monday’s option chain indicated that was the case: OI in the $105 calls dropped by exactly 1,000 contracts to 8,800:

Chart 2: 2. International Flavors & Fragrances (IFF) Dec. call options, 12/5/22. IFF options chain. Additional call trading on Monday.

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

Meanwhile, OI in the $110 calls and $105 puts both increased on Monday, suggesting much of Friday’s volume in these contracts consisted of traders getting into the market. Nonetheless, there was much more parity between “new” call and put positions on Friday than there may have initially appeared to be.

But that wasn't the end of the story. Monday’s option chain also showed more big trades in the $105 (1,500) and $110 calls (2,500). This time the OI in both contracts was more than the volume, which again meant it was possible that traders were lightening their positions.

Finally, the price chart shows Friday’s rally pushed IFF to the former support level defined by the September and June lows:

Chart 3: International Flavors & Fragrances (IFF), 6/1/22–12/5/22. International Flavors & Fragrances (IFF) price chart. Return to breakdown level.

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

Since falling to a two-and-a-half-year low in October after breaking down below that support level, IFF has rallied more than 25%. As of Monday the level was holding as resistance, with the stock trading in negative territory for most of the day. Whether it continues to turn back prices for any length of time remains to be seen, but today’s OI totals may further clarify whether traders were getting in or out call positions on Monday.

Market Mover Update: International Paper (IP) started the week by pulling back for a second day after breaking out of a short-term consolidation last week (see “Headline-grabbing trade comes with fine print”). February gold futures (GCG3) dropped sharply on Monday, falling below $1,779/ounce intraday and erasing last Thursday’s big up day.

Today’s numbers include (all times ET): Trade deficit (8:30 a.m.).

Today’s earnings include: AutoZone (AZO), Toll Brothers (TOL), Casey's General Stores (CASY), HealthEquity (HQY).


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