In this edition of the Alpha Letter, we cover:
Options: The option flow told us to buy DraftKings
Commodities: Lumber prices fell dramatically. Is this the end of inflation?
Dividend Growth: This Canadian iron ore company just bumped its dividend by 75%
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Let’s take a look at what’s happening in the option markets.
As of Tuesday at close, here were the 10 most active names in the options market, sorted by total premium traded (data from Vigtec)
AMC is losing steam a bit but it is still the 2nd-most active stock in the options market. It barely crossed $1 billion in premium Tuesday - still a massive amount for a midcap stock, but much less than the $4 and $5 billion days we’ve seen over the last couple of weeks.
Call premium for AMC still looks very healthy at more than 900,000 contracts traded.
One interesting play in Tuesday’s options market is DraftKings (DKNG), Hindenburg Research, the same one that took down Trevor Milton of Nikola Motor, released a short report against the sports betting company yesterday.
DraftKings stock plunged at the open, but we noticed something interesting in the options market: Call activity was going crazy.
It seemed that a group of traders (or just one large trader) was betting on DKNG to quickly recover. Sure enough, the stock gained as much as 9% from the low and closed down just 4.17%. All in all, a pretty average day for the volatile sports betting stock.
Put activity has obviously very high in the first few minutes of trading, but we could see that calls dominated later in the day while watching the trade tape.
Hindenburg’s short report alleged that DraftKings’ business is tied up in money laundering, organized crime, and illegal sports betting.
I think that DraftKings stock wasn’t destroyed by this report for a couple reasons. One, I think many investors already expect that companies operating in areas like sports betting are making money from legally grey areas, if not from completely illegal areas.
The second is that this alleged wrongdoing actually benefits shareholders. If DraftKings makes money from illegal gambling, that revenue flows to the income statement and benefits shareholders.
It’s very different than wrongdoing that harms shareholders, such as Hindenburg’s report about Nikola Motor exaggerating projections and lying about the capability of its products.
Volatility like this creates opportunities. Watch DraftKings, or other stocks that are moving, and the respective option flows to figure out if there’s a clear next move you can take advantage of.
Here’s a snippet of the DraftKings trade tape today:
Remember all the lumber jokes from last month?
Well the bubble in lumber pricing may have finally popped, or at least subsided for a bit.
The S&P commodity index (SPGSCI) is trading down this week as other commodity prices have taken a breather. The pause here could be a break in the hyper-inflation case many have been warning about, but it’s still too early to tell what the correct narrative is.
On the one hand, we’d expect large price surges as the economy quickly reopens. It only makes sense that airline tickets, hotel stays, and new homes would be bif up rapidly as suddenly millions of people could go on vacation and move around the country again.
However, the money printing by the federal government and over a decade of accommodative Fed policy makes some think that high inflation is inevitable, and this is just the start.
We’ll keep an eye on this for you and let you know what we see.
If you think inflation will continue to increase, it’s best to hold real assets like real estate, commodities, or stock in companies that control real assets and commodities. The worst position during high inflation is cash.
Looking for a high dividend yield play? Labrador Iron Ore Royalty (OTCMKTS: LIFZF) just bumped its dividend by 75% over the prior year.
Here’s the summary from Seeking Alpha:
The forward yield is currently 15.39%, but we expect buyers to jump in today to push the price up and the effective yield down. This announcement was made after the closing bell Tuesday, so this will definitely be a hot stock among yield-chasers tomorrow.
Labrador is in an industry that benefits from commodity pricing tailwinds, but the market doesn’t seem to be pricing that in correctly here.