Keeping up with unusual options activity (UOA) in this volatile market, now coupled with earnings season kicking off, is a bit like riding a bull – you just hang on for dear life and enjoy the ride.
There is so much action popping up and you have to stay quick with all the whips back and forth.
UOA trades from yesterday may have already moved. And trades from last week are completely irrelevant.
There’s a lot of reversions going on instead of continuations, making trades have an even shorter shelf life.
That may be about to change though.
Today, I have two big money trades from yesterday’s tape – Carvana Co. (NYSE: CVNA) and Caesars Entertainment (Nasdaq: CZR). I also want to give you a quick backdrop on this market.
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Because, let’s face it, volatility is here to stay.
And I expect this market to head lower than where it was a few days ago in the months ahead. The bottom isn’t in yet.
But, after the price action the last few days, a realistic tradeable bottom may be in. Not for the long haul, but for the next few weeks we could see stocks make a sharp run higher – a classic bear market rally.
Both of the UOA trades I selected for today were bullish for that reason.
I expect a short-term rally to play out.
I’ll record a video about this in the next couple of weeks, because what I’m seeing, is that the first bubble has popped – that was the growth bubble.
This is similar to the dotcom environment, and we’ve gone through that.
What is different this time is the Federal Reserve is still aggressively trying to slow down the economy.
They have come right out and said it. They want unemployment to go up. They want GDP to slow. They are fine with a recession.
That is the next shoe to drop in this market – the easy money is gone.
If we didn’t have the Fed so hell bent on this fight with inflation, I think this would be the ultimate bottom.
Since rates are remaining elevated, this market still has another crash ahead of it.
Even if the Fed cut rates this year, which isn’t likely, it would be too little too late.
So, in the months ahead, I’ll be looking to use any rallies to position for an even bigger selloff.
In the meantime, let’s keep grabbing the bull by the horns and steering it to profits in this volatile market.
We are watching two big trades today.
Let’s dive in…
Big Money Trade: CVNA $3.9 million
First up, Carvana.
This innovative automotive retailer has been pummeled since 2021 with the growth bubble popping. Trading for as high as $370 at one point, shares are now under $20.
That just happens to be the strike price for a massive, big money trade from yesterday.
One trader scooped up $3.9 million worth of the CVNA December 16th, 2022, $20 call option (CVNA221216C00020000).
This trade was executed in block format, meaning they wanted all contracts filled at a certain price.
Not as urgent as most UOA that we go through, but the short time period and amount of money were easily enough to put this one on my radar. A catalyst to look out for is earnings on November 3.
That could easily move the needle in either direction for the trade and it is something this trader clearly has on their mind.
I’d like to see the stock back above that $19.80 key level on the chart. It’s red, because it should act as a resistance after previously holding as support in June and July. You can see the attempted double bottom there, before shares finally broke below it this month.
The stock is in the lagging quadrant, indicated by the red bars on the chart, signaling it has room to turn higher as it moves into the improving quadrant on the relative rotation graph.
That’s what I want to see before following a trade like this.
It’s got a lot of money behind it, but I want to see some confirmation from the price of the stock before I jump in.
Big Money Trade: CZR $915k and $570k
Okay, so this one is technically two trades, but one I like a lot better.
The Vegas casino operator, Caesars Entertainment, has seen it stock tumble over 60% from the 2021 peak also.
Not as dramatic of a drop as Carvana, but there is still some intense selling going on for the stock.
Shares are pinballing around in a falling wedge pattern at the moment, setting up a potential breakout on earnings on November 1.
A pattern like this doesn’t tell us much more than to expect a big move.
Shares have plenty of room to continue moving lower inside this pattern without a breakout, even beyond an earnings date at the start of November on the 1st.
At least two traders see a breakout coming though.
One was a $915k bet on the stock to rise into the November 18 expiration, with the $36 CZR call option (CZR221118C00036000).
This was executed as a sweep trade, which shows a sense of urgency in this volatile market. But it was also conservative since the strike price was already in-the-money. I tend to look for out-of-the-money plays that are more aggressive in nature.
But there was another big money trade on CZR earlier in the day, that checked all the boxes. Showed urgency, had a large amount on the line and went out of the money.
Here’s what they bought.
This trader spent $570k on the November 4, 2022, $42 call option (CZR221104C00042000).
Clearly both are driven by earnings, but this second one doesn’t leave much time left after the announcement.
Meanwhile, that first trader is in a couple of weeks ahead and leaves a couple of weeks on the backend. Again, more conservative with the ITM strike and extra time in the option, compared to an OTM strike and expiration just after the big day.
This all comes down to risk appetite.
We are already trading options, so your risk appetite has to be pretty large. But I think the bigger cushion you can build around an earnings event, the better. It makes it less of an outright earnings gamble, and a bit more strategic.
That’s why I personally like the first trade over the second, even though they both are looking for the same goal – to profit from a jump on earnings.
I’m going to add both of these stocks today to my Bank It or Tank It watchlist for the Flash Alerts system.
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It’s a style of trading that resembles my personal approach.
Gambling on earnings isn’t my style.
I have no problems waiting for breakouts to occur (post earnings), then riding those stocks from there.
And more of those opportunities are on the way.
Let’s get it!
Chad Shoop, CMT
Editor, Bank It or Tank It ELITE