Options in play after retracement

03/31/22
  • MDU call-put ratio near 30 as stock pushed to one-month high
  • Stock up more than 5% since testing retracement level
  • Utilities one of three positive S&P sectors this year

While the utilities sector usually makes the news when investors are shifting into traditionally defensive areas of the market during times of uncertainty and volatility, on Wednesday a utility-related stock may have caught the eye of a few traders.

Yesterday morning MDU Resources (MDU), a utilities, construction services, and basic materials company, was near the top of the LiveAction scan for high call-put ratios, with call volume nearly 30 times put volume:

Chart 1: LiveAction scan: Highest put-call ratios, 3/30/22. Unusual options activity. Call volume nearly 30 times put volume.

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


The options chain showed that 99% of that activity was in the July $30 calls—a strike price roughly 13% above where the stock was trading early yesterday afternoon ($26.50). The fact that the July $30 calls had open interest of only 316 contracts means that the vast majority (if not all) of yesterday’s volume consisted of new positions, not the liquidation of existing ones:

Chart 2: MDU Resources (MDU) July call options, 3/30/22. MDU Resources (MDU) options chain. 5,900 contracts traded in July $30 calls.

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


Meanwhile, MDU’s price action has a few interesting characteristics. First, until a couple of weeks ago the stock hadn’t participated in the recent strength in the utilities sector, which has been one strongest areas of the market since late February.

But the stock has been climbing for the past couple of weeks after falling around 20% from its January high of $31.70, which was just the most recent leg of a larger correction from its May 2021 highs. In fact, this month’s rebound coincided with a test of the 50% retracement level of MDU’s March 2020–May 2021 rally:

Chart 3: MDU Resources (MDU), 12/8/21–3/30/22. MDU Resources (MDU) price chart. Bounced off retracement level.

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


Also, yesterday’s call activity coincided with the stock pushing to its highest level in nearly a month, although shares later fell into the red for the day as the broad market’s losses deepened.

In isolation, none of these factors may seem particularly compelling. Together, they may paint a picture that some traders may find deserves a closer look.

One final observation: While this year’s strength in utility stocks could certainly be attributed to the broad market’s volatility, the S&P utilities sector has gained more than 5% over the past five trading days—nearly two percentage points more than the S&P 500.

Market Mover Update: A double-digit percentage gain for Lithium Americas (LAC) was the highlight of a big day for lithium stocks on Wednesday amid reports that the Biden administration was looking to invoke the Defense Production Act1 (see “Lithium stocks diverge from trend”).

Today’s numbers include (all times ET): Challenger Job-Cut Report (7:30 a.m.), Weekly Jobless Claims (8:30 a.m.), Personal Income and Outlays (8:30 a.m.), PCE Price Index (8:30 a.m.), Chicago PMI (9:45 a.m.), EIA Natural Gas Report (10:30 a.m.), OPEC meeting.

Today’s earnings include: Walgreens (WBA).

 

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1 Bloomberg. Biden Poised to Invoke Cold-War Powers to Boost Battery Metals. 3/30/22.

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