Stock coils like a snake, options traders strike

04/10/19
  • WIX stock has been consolidating near its record high
  • Yesterday WIX call options volume was nearly 10 times average
  • Are some options traders positioning for a near-term breakout?

A stock moving sideways, a sudden surge in options volume…

It’s the kind of thing that can make some traders wonder whether a stock is poised to break out.

Markets sometimes go nowhere for much longer than people expect, and when they do move, you can never be sure about the direction—but it’s usually worthwhile to investigate high-momentum stocks that have taken a breather, especially when out-of-the-ordinary options activity enters the picture.

Yesterday, Power E*TRADE LiveAction scans for unusual options volume showed website design and editing software company (WIX) near the top of the list. A couple more clicks revealed nothing unusual on the put options side, but in call land volume was more than nine times average:

LiveAction scan: Unusual call volume. WIX (WIX) unusual options activity. Nearly 10 times average call volume

Source: Power E*TRADE


Unlike many of the other stocks high on the LiveAction scan, WIX shares weren’t making a big move. Sure, they were up more than 1% in early trading while the broad market was solidly in the red, but a quick look at the price chart (below) showed the stock was still firmly entrenched in the consolidation it formed after a 13% price surge on March 20–21.

This trading range has formed a little below WIX’s February 19 all-time high around $126, which the stock retreated from one day later after topping its quarterly earnings and revenue estimates, but offering a Q1 outlook below what analysts had expected.1

WIX (WIX), 12/31/18–4/9/19. WIX (WIX) price chart. Consolidating near highs.

Source: Power E*TRADE


WIX has been trading publicly in the US only since late 2013, when it opened around $16.50. It’s had a good run the past few years, and at its February high it had rallied around 53% just from its December lows. Also, coincidence or not, the stock’s March upswing occurred as Guggenheim analysts initiated coverage of the company with a “buy” rating.2

So, we have a big jump in call options activity in a recently uptrending stock that’s been moving sideways near its highs for the better part of three weeks—a setup that could be a tip-off that options traders expect the stock to push out of that range. (This is similar to the situation in Santander Consumer stock last week—check out “Going big.”)

A big portion of yesterday’s options volume consisted of new positions (as opposed to existing positions that were being closed) in the April $125 and $135 calls expiring a week from Thursday—around 2,000 contracts of the former and 1,500 of the latter. At the time, the stock was trading around $120.50, which means both options were well “out of the money.”

Both scenarios imply some traders may expect WIX to at least challenge its record high.

Although it’s impossible to be certain about what options trades “mean”—they can be components of complex option spreads or option-stock combination trades—in the context of the WIX’s recent price action (and longer-term bullishness), here are two related possibilities:

1. The call option buyers were expecting a big up move in WIX stock—that is, enough to break the stock out of its consolidation and make the options profitable before they expire next week.

2. At least some of the volume in the April $125 and $135 calls consisted of a “bull call spread”—a more modestly bullish position that consists of the simultaneous purchase of $125 calls and sale of $135 calls. In this case, the trader is anticipating a move between the two strike prices ($125 and $135) by expiration, in which case the $125 calls will be in the money (and profitable) and the $135 calls will be worthless and the trader will get to keep the premium collected from selling them.

Ultimately, both scenarios imply traders expect WIX to at least challenge its record high soon.

That’s no guarantee traders with this outlook will be right, but at some point, WIX will emerge from the cocoon of its consolidation. Whether it flies higher or lower is uncertain, but traders may be in the process of establishing their positions.

Today’s numbers (all times ET): ECB Announcement (7:45 a.m.), Consumer Price Index CPI (8:30 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), FOMC Minutes (2 p.m.).

Today’s earnings include: Delta Air Lines (DAL), MSC Industrial (MSM), Bed Bath & Beyond (BBBY).

 

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1 StreetInsider.com. Wix.com (WIX) Earnings. 4/9/9.

2 TheFly.com. Wix.com initiated with a Buy at Guggenheim. 3/19/19.

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