Piecing together options activity and price action

Some people were apparently hungry for Hershey (HSY) yesterday—not the chocolate, but options.

Less than halfway through the trading session, LiveAction scans showed HSY call options volume was nearly eight times its daily average:

LiveAction scan: Unusual call options volume. Hershey (HSY) coption activity

Source: OptionsHouse

Options volume often spikes around earnings or other major corporate announcements (Hershey last released quarterly numbers on May 3), but a scan of headlines didn’t turn up any breaking news about the company. What’s the story?

At the time, HSY was down a modest 0.3%—around half the S&P 500’s (SPX) loss at the time—although the daily chart below shows it was a volatile day for the stock: The daily range was more than twice the 20-day average, and the stock had made a 12-day high and a six-day low with hours to go before the closing bell.

Hershey (HSY), 3/26/2018 – 5/15/18. Hershey (HSY) daily price chart. High-volatility day

Source: OptionsHouse

The longer-term chart below shows something else: The stock had recently declined to its lowest level in more than two years before rebounding (along with most of the market) last week, and then pulling back over the past couple of days.

So, we have a stock that sold off more than 20% from its pre-correction high above $115 and, after bouncing off that high, formed a wide-range day (on no news)—what some traders may interpret as a stock “searching for direction”—while racking up heavy call options volume.

And then one other interesting development…developed. Between the time HSY showed up on the options activity scans and the time it took to write this, the stock pushed into the green for the day.

Hershey (HSY), 9/10/15 – 5/15/18. Hershey (HSY) daily price chart. Rebound off two-year low

Source: OptionsHouse

Long live the streak: Although in some circles yesterday’s down day was attributed to another push above 3% by 10-year Treasury yields, the stock market may have been due for a breather, anyway. Monday’s lower close snapped the Dow Jones Industrial Average’s (DJIA) winning streak at eight days—the longest such stretch since a nine-day run from 9/8/2017 – 9/20/2017. In fact, the Dow has had only four winning streaks longer than eight days since 2008, and most of them occurred in the past year: 7/25/2017 – 8/7/2017 (10 days), 2/9/2017 – 2/27/2017 (12 days), 7/8/2016 – 7/20/2016 (nine days), and 3/1/2013 – 3/14/2013 (10 days).

Although since February 1985 there have been only 18 other eight-day Dow winning streaks followed by a down day (like yesterday), it may be worthwhile to look at what happened after these events—even if you can’t read too much into the results because of the scarcity of examples. The Dow’s median gain five days after them (0.63%) was nearly twice as much as its median gain for the entire 1985-2018 period (0.34%), although the index was actually higher slightly less frequently (56% of the time vs. 58% of the time), which suggests that in those instances when the Dow resumed its uptrend, it did so with a little more than its typical momentum.

After 10 days, the Dow’s outperformance after the eight-day runs was a bit more pronounced: The median return was 1.28% (vs. 0.61% overall) and it was higher 67% of the time (vs. 59% overall period).1


Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.

1 Supporting document available upon request.