Rock and roll over

  • FOUR approached potential support Monday on heavy put volume
  • Shares down more than 20% since April after 202% rally
  • High options volume a rollover pattern?

Unusual options activity can potentially highlight useful, under-the-radar developments in a stock, but a good rule of thumb is to avoid rushing to judgment about the nature of that activity.

Yesterday, for example, payment-processing tech stock Shift4 Payments (FOUR) may have landed on trader radar because of its unusual options volume—around seven times average a couple of hours into the trading session (top half):

Chart 1: LiveAction scan: Unusual options volume and high put-call ratio, 8/13/21. Unusual options activity. Heavy options volume (top), emphasis on puts (bottom).

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

The bottom half of the chart reveals that puts were the real stars of the show—the stock had an unusually high put-call ratio, with puts outnumbering calls around 79 to 1. The difference-makers were a couple of 1,200-contract trades (or collections of trades), one in the September $80 puts expiring this Friday and one in the October $75 puts expiring in a little more than a month. Those 2,400 contracts accounted for nearly 73% of FOUR’s put volume as of 2 p.m. ET.

It’s impossible to determine the rationale or purpose of any particular options position, but some traders would immediately “connect the dots” between high put volume and the reality that FOUR has sold off around 10% over the past seven days, and has declined as much as 26% since April after tripling in the first eight months after its June 2020 IPO. Yesterday, the stock was still around 22% below its all-time high.

But the fact that yesterday’s two conspicuously large options trades were the same size may lead some observers to believe that a trader was “rolling” a big position from September to October—that is, liquidating a position in a soon-to-expire contract month and re-establishing it in the next month (in this case, at a slightly lower strike price).

For example, a trader who was long the September $80 puts (perhaps a bearish bet on the stock, perhaps a bull hedging a long stock position during a volatile time of year) may have sold 1,200 contracts while simultaneously buying 1,200 of the October $75 puts. One possible implication: FOUR’s put activity wasn’t quite as “unusual” as it initially appeared to be, since the two big chunks of volume may have really represented a single position.

Meanwhile, FOUR’s price chart shows the stock is near what some traders would view as an important support level—the May and August lows (roughly $75–$77):

Chart 2: Shift4 Payments (FOUR), 6/5/20–9/13/21. Shift4 Payments (FOUR) price chart. Pivoted off support.

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

The chart’s inset shows FOUR pushed into positive territory yesterday after first trading a little below the August low. The stock rallied more than 14% off this level after its August 19 low, and roughly 34% off it in May when the stock hit its correction low, which (as Fibonacci enthusiasts would likely tell you) was also a 38.2% retracement level of its June 2020–April 2021 rally.

The more information you add, the more the picture can change. Big trades can make big first impressions, but traders need to spend enough time with unusual options data to make sure they get a clearer picture of what may be going on beneath the surface.

Market Mover Update: The energy sector led the US market yesterday as November WTI crude oil futures (CLX1) followed through on Friday’s rally to close above $70/barrel for the first time since July 30. BlackLine (BL) pulled back for a third day since hitting a five-month high on September 8 (see “The patience edge”).

Today’s numbers include (all times ET): NFIB Business Optimism Index (6 a.m.), Consumer Price Index CPI (8:30 a.m.).

Today’s earnings include: Skillsoft (SKIL).

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