Options volume breakout

01/27/21
  • CTSH call options volume 14 times average Wednesday morning
  • Stock has been stuck in a trading range since mid-December
  • Shares doubled between March and December

When a stock trades nearly 10 times as many options as usual—and nearly 14 times as many calls—it’s only natural to scour the headlines looking for what may be driving the action:

Chart 1: LiveAction scan: Unusual call volume. Unusual options activity. Call volume nearly 14 times avg.

Source: Power E*TRADE


In this case, there were no headlines to be found. Yes, IT services company Cognizant Technology Solutions (CTSH) has been on a bit of a spending spree lately, scooping up three companies so far this month—most recently software developer Magenic Technologies—but that news crossed the wire six days ago.1

Cognizant may not be a household name, but it’s one of the biggest IT services companies in the world,2 and like many things tech, it took off last year as the newly remote world drove demand for all manner of tech solutions. The stock more than doubled from its March low to its mid-December high of $82.73, but it’s been trapped in a $4 range since then—despite those business acquisitions and some heavy activity on the options tape:

Chart 2: Cognizant Technology Solutions (CTSH), 3/20/20–1/26/21. Cognizant Technology Solutions (CTSH) price chart. Six-week trading range.

Source: Power E*TRADE


But while headlines have been scarce lately, that won’t be the case for much longer: CTSH is scheduled to release earnings on February 3. (When it last posted numbers on October 28, the company upped its full-year earnings and revenue guidance.3)

Will next week’s data provide the catalyst for a trading range breakout? Earnings announcements certainly can be volatile events, and the following short-term chart shows that CTSH’s 30-day implied volatility (IV) was running around 10 percentage points above its 30-day historical volatility (HV)—a signal the options market is potentially anticipating price action to pick up from recent levels:

Chart 3: Cognizant Technology Solutions (CTSH), 12/31/20–1/26/21. Cognizant Technology Solutions (CTSH) price chart. Higher implied volatility.

Source: Power E*TRADE


Of course, there’s always the question of which direction that price action will be in, but traders expecting a challenge to the stock’s all-time highs around $85 may be using calls to position themselves, either outright or in bull call spreads.

Market mover update: Speaking of trading ranges, March WTI crude oil futures (CLH1) is pushing two weeks of trading mostly between $52–$54/barrel after rallying 41% off its early November spike low (see “Oil pivot”). After jumping around 14% the past two days, vaccine maker Moderna (MRNA) extended its gain since January 6 to more than 30% (see “Lining up price and volatility patterns”).

Today’s numbers (all times ET): Mortgage applications (7 a.m.), Durable Goods Orders (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.), Survey of Business Uncertainty (11 a.m.), FOMC announcement (2 p.m.).

Today’s earnings include: Apple (AAPL), Abbott Laboratories (ABT), AT&T (T), Boeing (BA), General Dynamics (GD), Facebook (FB), Tesla (TSLA).

 

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1 Zacks Equity Research. Cognizant (CTSH) to Buy Custom Software Developer Magenic. 1/21/21.
2 InsiderMonkey.com. 15 Largest IT Services Companies in the World. 1/5/21.
3 StreetInsider.com. Cognizant (CTSH) Tops Q3 EPS by 7c; Raises Outlook. 10/28/20.

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