Tech test

03/29/22
  • SQ tested recent breakout level amid active options trading
  • Stock up more than 45% after 69% decline from Oct. highs
  • Options volatility moderate despite recent volatility

When a stock appears on multiple scans for unusual options behavior, it’s usually worthwhile to take a closer look. Even if it’s not immediately clear what the activity “means,” it can at least highlight potentially interesting tickers that may have otherwise flown under the radar.

On Monday Block (SQ) appeared at different times on LiveAction scans for high positive net deltas, high positive net premiums, unusual options volume, and largest number of trades.

The payment-processing company formerly known as Square has long been an actively traded stock (average daily volume in excess of 20 million shares), but it’s been a while since it has regularly rewarded bulls. After more than quintupling in less than a year after hitting its March 2020 lows, SQ closed at a record-high $281.81 last August, but a 69% correction from its October highs dropped shares as low as $82.72 by February 24:

Chart 1: Block (SQ), 10/13/21–3/28/22. Block (SQ) price chart. Pulled back to breakout level.

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


After bouncing off that low to challenge its early February high, the stock pulled back again, then broke out above both those highs with a four-day, 48% rally. Last Thursday and Friday, SQ did what markets often do after a high-momentum breakout move—pulled back to “test” the breakout level.

Whether that test turns out to be successful—that is, whether prices hold around the current level and ultimately move higher—remains to be seen. (Shares were up more than 3% during much of yesterday’s trading session.) But traders considering SQ options may have noticed that implied volatility (IV) levels were fairly moderate, especially considering the stock’s recent volatility. For example, SQ’s “volatility constellation” showed the IVs for options in the next several expirations were at or below average:

Chart 2: SQ volatility constellation, 3/28/22. Block (SQ) option volatility. IV mostly below 30-day avg.

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


Also, SQ’s overall IV was around half its historical volatility (HV), which means the options market’s expectation of near-term future volatility was low relative to how much the stock has actually moved in the recent past. (The caveat here is that SQ’s HV was exceptionally high—as high as it’s been since April 2020—which means IV wasn’t necessarily low from a much longer-term perspective.)

Although this type of information can’t help a trader determine if a stock is likely to successfully test a technical level, it can help determine whether options are potentially overpriced because of high volatility. Because traders who use options to go long know that it’s not just about the stock price—the goal is to “buy” volatility at a relative low, too.

Market Mover Update: Bumble (BMBL) kicked off this week by doing more of what it did last week—namely, not much of anything:

Chart 3:Bumble (BMBL), 1/10/22–3/28/22. Bumble (BMBL) price chart. Still rangebound.

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


That hasn’t been a positive for traders who may have bought straddles or other “long-volatility” spreads last week in anticipation of a consolidation breakout. For example, the April $30 long straddle that was trading around $450 on March 23 had fallen around 8% to $415 yesterday (see “Straddle realities”).

Today’s numbers include (all times ET): S&P Case-Shiller Home Price (8 a.m.), FHFA House Price Index (8 a.m.), Job Openings and Labor Turnover Survey (9 a.m.), Consumer Confidence Index (9 a.m.).

Today’s earnings include: McCormick (MKC), I-Mab (IMAB), PVH (PVH), Chewy (CHWY), RH (RH), Verint Systems (VRNT), Micron Technology (MU), Lululemon (LULU).

 

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