With stock quiet, options speak volumes
08/31/18

●Rockwell Collins (COL) has been stuck in a range for almost a year.

●The range has narrowed in recent weeks.

●COL put options volume was exceptionally high yesterday.


 

When nothing seems to be happening in price-action land, it can be a good idea to pay attention to what’s going on in options world.

Case in point: Rockwell Collins (COL), the aviation components and tech manufacturer, which has been in the market equivalent of a holding pattern this year after a high-flying 2017:

Rockwell Collins (COL), 2/15/17–8/30/18. Rockwell Collins (COL) price chart.  Holding pattern

Source: OptionsHouse

Some traders would probably argue the stock’s trading range began in November (or even September) 2017, when it pushed above $135. Shares inched up to a little above $139 in early 2018, tagged $130 on the downside in early May, and that’s pretty much been the whole enchilada since.

The shorter-term chart below show the stock has been tightening its range since selling off after its last earnings report on July 27, when it missed its headline earnings number.1 Yesterday was another snoozer on the price chart, with the stock down around 0.15% and trading almost entirely within Wednesday’s range. Move along, nothing to see here.

Rockwell Collins (COL), 6/27/2018–8/30/18. Rockwell Collins (COL) price chart. Tightening range

Source: OptionsHouse

The options market was a different story: A LiveAction scan showed COL put options volume was running more than seven times its average daily rate (top portion of chart, below) in early trading. That could imply a few things, or nothing—especially if call options volume was as high or higher. But the bottom portion of the chart shows COL’s put/call ratio was at the top of the LiveAction list, with around 800 puts trading for every call.
LiveAction Scan: Unusual Put Volume (top) and High Put/Call Ratio (bottom)

Source: OptionsHouse

Now, since there’s an option seller for every option buyer, it’s impossible to be certain whether such heavy put volume leans more toward the bearish side (traders initiating new long-put trades in anticipation of a falling stock price) or the bullish side (traders initiating new short-put positions in anticipation of a rally).

But this level of volume indicates potential market interest in something happening in COL. While stock traders have been laying low, options traders may have been positioning themselves.

Labor Day Alert: Monday is Labor Day (as if you didn’t know), which means US equity markets will be closed (select US futures contracts will trade on a limited basis). As of yesterday, this week had unfolded pretty much according to historical script: From 1960-2017, the S&P 500 (SPX) gained ground in the week before Labor Day in 37 out of 58 years (64% of the time). Barring a close below 2874.69 today, it will be 38 of the past 59 years.

The SPX’s performance during the short holiday week wasn’t as bullish, though: The index moved higher over these four days in only 29 of the past 58 years, and had an average return of -0.06%2—interestingly, a tendency that may dovetail with the breakout/pullback pattern outlined in “The reality of new market highs.”

Market Mover Update: Amazon.com (AMZN) followed up on Wednesday’s 3% rally by trading above $2,000 for the first time yesterday.

DSW (DSW) has declined for the past two days after jumping more than 20% on Tuesday, and its options implied volatility fell around 35%.

 

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1 Zacks.com. Rockwell Collins (COL) Misses Q3 Earnings & Revenue Estimates. 7/27/18.

2 Supporting document available upon request.