Trader shopping list

06/02/20
  • SPTN crushed earnings last Wednesday, +20% in five days
  • Options IV has dropped more than 37% since last week
  • Call options opportunity on stock pullback?

If you were putting together a list of things you wanted to see in a typical short-term buy trade, two things that stand a good chance of making the cut are:

1. Evidence of an uptrend (and reason to believe it can continue).

2. A price pullback (so you have the chance to enter at an advantageous price).

And for options traders, that shopping list would probably also include:

3. Relatively cheap call prices.

Grocer and food wholesaler SpartanNash (SPTN) recently appeared to have two out of three, with the potential to make it a clean sweep. Let’s take a look at the situation as traders may have seen it yesterday morning.

First, the stock showed up on yesterday’s LiveAction scan for large one-week implied volatility declines:

Chart 1: LiveAction scan: Big one-week IV loss. SPTN implied volatility -37% from last week.

Source: Power E*TRADE


Implied volatility (IV) is the options market’s estimate of a stock’s future volatility—the higher the IV, the more options traders expect the stock to move, and the higher (usually) options premiums are as a result.

As is often the case, SPTN’s IV decline since last week was a function of it being so high before May 27—the day it crushed its earnings and (possibly) surprised analysts with strong forward guidance.1

The chart below shows SPTN has rocketed to the upside since mid-March (+135%), outperforming several other stocks in the grocery game, including Kroger (KR), Costco (COST), Walmart (WMT)—all of which, like SPTN, arguably benefited from people stocking up on food and other staples during the pandemic lockdown:

Chart 2: SpartanNash (SPTN), Kroger (KR), Costco (COST), Walmart (WMT), 3/12/20–6/1/20. SPTN outperformance.

Source: Power E*TRADE


Assuming SPTN’s IV continues to drop, many options traders would lean toward buying options rather than selling them, since lower IV typically results in relatively lower options prices. (For example, IV for SPTN July options was below the 30-day average yesterday.)

While traders who think the stock may be due for a downturn after such a bullish shopping spree would be looking to buy puts, those anticipating more upside would look for call opportunities—perhaps after the stock pulls back, say, to the vicinity of last week’s pre-earnings breakout.

Because the combination of lower IV and lower stock prices is likely to produce lower call premiums, traders who wait for that type of setup are essentially waiting for a “sale” to do their shopping.

VIX flashes yellow. The options market may have been sending the stock market a little message yesterday. While the S&P 500 (SPX) kicked off June with a 0.4% gain and closed at its highest level in nearly three months, the stock market’s fear gauge, the Cboe Volatility Index (VIX), also closed higher.

The VIX, which is based on the implied volatility of SPX options, typically rallies when the market sells off (reflecting more investor fear) and declines when the stock market rallies (less investor fear). When the VIX closes higher when the SPX makes a 60-day new high, like it did yesterday, it can mean traders are feeling more anxious despite higher stock prices—a condition sometimes followed by at least a short-term market pause or pullback.

Market Mover Update: Cloud security Zscaler (ZS) followed up on Friday’s 29% earnings-beat explosion with a 7%-plus rally yesterday (see “Stock in the clouds”).

After a solid showing last week, financial stocks started off this week with more bullishness, placing second among S&P 500 sectors yesterday; JPMorgan Chase (JPM) got back into the plus column after pulling back a little from last week’s 15% breakout move (see “Rotation watch”). Airline stocks also turned higher Monday after a two-day pullback.

Today’s numbers (all times ET): Vehicle sales, Reserve Bank of Australia (RBA) announcement (12:30 a.m.).

Today’s earnings include: Cracker Barrel (CBRL), Baozun (BZUN), Zoom Video Communications (ZM), Tiffany (TIF), CrowdStrike (CRWD), Dick’s Sporting Goods (DKS).

 

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1 StreetInsider. SpartanNash (SPTN) Tops Q1 EPS by 20c, Revenues Beat; Raises FY20 EPS Guidance. 5/27/20.

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