Sweet spot?
01/04/19

●DNKN bucked yesterday’s sell-off, without the benefit of a news catalyst

●Call options volume outpaced put volume by a wide margin


 

With the broad market down nearly 2% about an hour into yesterday’s trading session, there weren’t many brand-name stocks trading up more than 4%—at least, not ones that weren’t part of a merger.

Interestingly, Dunkin’ Brands (DNKN), purveyors of more than just donuts, was one of them. The stock eventually jumped more than 5% (topping $66) before easing up on the throttle:

Dunkin’ Brands (DNKN), 10/21/18–1/3/19. Dunkin’ Brands (DNKN) price chart. Stock jumps after December selloff.

Source: Power E*TRADE


It was an interesting move, given there was no breaking news coming across the wire, no looming earnings announcement (next report due on February 6), and it wasn’t National Doughnut or Coffee Day.

There were even fewer stocks with exceptionally heavy call options trading, as evidenced by the following Power E*TRADE LiveAction scan, which shows DNKN near the top of a sparse list with call volume at 373% its average level:

LiveAction scan: Unusual call options volume, 1/3/19. Dunkin’ Brands (DNKN) call options activity.

Source: Power E*TRADE


At the same time, DNKN’s call/put ratio was above 25—meaning, 25 call options had traded for every put option. In certain situations, traders may interpret this type of exceptional call options activity as a contrarian signal. For example, if a stock had a huge up day after already rallying for several weeks, some traders may see extreme call options volume on that day as a sign of a potential peak in bullish sentiment and a possible pause or downtrend in the stock. (The same principle, in reverse, would apply to unusual put volume and extremely high put/call readings after a sell-off.)

In this case, though, DNKN had a big up day soon after a 17%-plus correction from its early December highs around $75 (the stock hit a record high of $77.13 in September). That makes it a little tougher to argue that yesterday’s options activity was a sign that bullish traders and investors were going overboard in an overheated stock.

One of the ironies in this type of situation is that such big one-day moves often reverse, at least partially, before regaining their momentum. Experienced traders wouldn’t be surprised to see DNKN give back some of yesterday’s gain, even if the broad market rebounds.

Market Mover Update: Gold’s stealth rally has become a bit less stealthy lately, with the yellow metal hitting its highest level since June. February gold futures (GCG9) touched $1,294.30/ounce yesterday, a 4.2% gain since December 14, and the ninth time in the last 10 days the market has made either a higher high or higher close.

Apple’s (AAPL) guidance update—and the market’s reaction to it yesterday—was a reminder of the dramatic impact announcements from high-profile companies could have as earnings season unfolds (see “A peek at peak earnings”).

Today’s numbers (all times ET): Jobs report (8:30 a.m.), PMI Services Index (9:45 a.m.), Fed Chairman Jerome Powell speaks at the American Economic Association in Atlanta  (10:15 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: Lamb Weston (LW), RPM Inc. (RPM).

 

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