These mid caps could fly this week

In this edition of the Alpha Letter, we cover: 

  • Options: How AMC dominates the options market

  • Stocks: Russell 2000 stocks that are set to fly

But first, a word from our sponsor:

Decentralized Options Protocol.

SIREN Markets is a decentralized application used for creating, trading, and redeeming fully-collateralized options contracts for any ERC20 token on Ethereum. With over $4M raised, our investors include Spartan Group, 1kx, QCP Capital, CMS Holdings, Naval Ravikant, Mechanism Capital, Robot Ventures, and Rockaway Blockchain Fund.

SIREN is focused on creating a high-quality, seamless experience for sophisticated users and requires no third-party settling mechanism or order matching to complete option settlement on chain. We have settled over $10M cumulative volume since our March 2021 launch. 

Our current Call options include MATIC, UNI, SUSHI, YEARN and WETH/USDC and puts for WETH/USDC. If you are looking to hedge your risk in the DeFi market, trade here on our platform.

Stocks & Options

Let’s take a look at what’s happening in the option markets. 

As of Friday at close, here were the most active names in the options market, sorted by total premium traded, thanks to vigtec:

I like to refer to this chart a couple times a day to get a sense of the market. The top five to ten slots are usually filled by the names you’d expect: SPX (the S&P 500 index), Tesla, Amazon, and QQQ (The Nasdaq 100 ETF).

The last few weeks have seen a surprising name overtake the board, landing on the number one spot several days over the last few weeks: AMC.

For a relatively small company like AMC, currently sitting at a $24 billion market cap, to overtake securities with market caps in the trillions in terms of option premium traded is incredible. The fact that it’s happened on several different days is almost unbelievable.

There are many different reasons why stocks shoot up. It could be good news, a change in sentiment or outlook, or nearly any other reason. But right now, we are seeing a trend of stocks going up just because people want them to.

AMC and GameStop are up hundreds of percent because traders want them to go up. 

Oftentimes, this story is told in the options market.

It’s not normal for a mid cap company, which AMC was just a few weeks ago, to dominate Tesla and Amazon in the stock market. Even before the surge in price, the options market told us that AMC was about to pop.

So the reason I watch the options flow is because it sometimes tells us which stocks will pop next (or which ones that are already popping still have momentum).

Here are the next eight names on that list from Friday’s close:

Starting with this table, you can start to identify stock with a positive option flow. You’ll need to dig in and carefully identify if a bullish option flow is because of a rally that’s already ended or some other event. For example, stable blue chip stocks will often have very high option volume the day before the ex-dividend date. The strategy is known as dividend arbitrage. 

Here’s how Investopedia defines dividend arbitrage:

Dividend arbitrage is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before its ex-dividend date and then exercising the put after collecting the dividend. When used on a security with low volatility (causing lower options premiums) and a high dividend, dividend arbitrage can result in an investor realizing profits while assuming very low to no risk.

Dividend arbitrage aside, let’s take a look at some Russell 2000 stocks that saw huge call volume on Friday. This could give us a good starting point for stocks to watch today.

First, let’s start with a stock whose ticker is perfect: RAMP. Liveramp Holdings Inc was flagged as oversold last week after losing 14%. There was high volume in the $45 calls expiring on Friday June 18th (RAMP closed Friday at $41.75). 

I’m also seeing huge call volume in Camping World (CWH). Take a look at the multiple CWH calls showing up on this “on fire calls scan” from the Options Matrix:

CWH was mostly flat last week, so large call volume could be a good sign for this week. Often call volume will be high after a large rally, so we want to make sure we’re not just buying the top of a stock based on recent call volume spikes.

You’ll also notice Vaxart (VXRT) on that list. It popped 21% just after the open on Friday, so a lot of that call volume could be traders who quickly bought and sold calls as the stock was rising. High volume here is probably not an indicator that the stock will rally again Monday.

Alpha Thought