Jon Najarian spoke on CNBC Halftime Report about his view on today’s market rally, including three unusual option activity trade ideas.
Buy the Bounce, or Sell the Rally?
Asked whether he “bought the bounce” in the market today, Jon had this to say,
“Our technical analyst AJ Monte thinks we’re still going to continue to see lower lows. Last week during his Weekly Market Report, AJ said, “We’re going to see a rally sometime next week and it’s going to be sold.”
Check out AJ Monte's Weekly Market Report inside Market Rebellion's Rebel Hub
In short: the technicals don’t support it. But what do the underlying metrics of the options market have to say?
“Pete and I talk about volume, volatility, and velocity — and so far today, we are not seeing that ‘volume’. We need to see high volume on an up day for a change. I mean today, so far at mid session, we’re seeing about 20 million option turnover. The average for the year is 41 million for the full day — we’re at the halfway point. I don’t know if we’ll make even the average.
Last week when we had that big rally on Wednesday with the Fed move and we said “that’s going to be ripped up the next day,” — it was. And that was in the 30’s — 36 million contracts that day. I think we have to see on a rally day, something in 45-50 million range to say “okay, now you’ve got the shorts out”, but right now, you don’t.”
Jon summed it up,
In short: Jon isn’t out here buying everything, and he doesn’t believe that the market is out of the woods just yet. But that doesn’t mean he’s staying on the sidelines — and you don’t have to either.
Jon broke down three ways to trade the market in his segment on unusual option activity.
US Global Jets ETF (JETS) Calls
Jon’s first trade was in (JETS), where he spotted unusual option activity in the $18 strike calls expiring in September, 2021. The trade: 17,900 calls bought for between $1.12 to $1.16, with the JETS ETF trading at $16.92. Airlines saw a small reprieve last week, with the price of “Jet A- type” fuel declining substantially — a tailwind for the travel trade. Add on that demand for travel continues to surge, and it’s easy to see why someone would trade these calls.
Cenovus Energy (CVE) Call Spreads
Jon’s second trade was in the natural gas stock Cenovus Energy (CVE). This was also a bullish trade, except this one had an even shorter time horizon — the July 15th expiry. The buyer picked up 10,000 of the $21 strike calls for $0.90 a piece, and hedged that by selling 10,000 of the $23 strike calls for between $0.32 and $0.33 per contract — a net debit of between $0.57 and $0.58.
This trader decided to utilize a vertical debit spread for this particular trade. Want to know more about vertical spreads, check out last week's article: Debit or Credit: Which Vertical Spread is Right For You?
Like many energy names, the stock has been on a swift uptrend throughout 2022. Despite the energy sector’s recent bearish price action, CVE is still up more than 58% to date. With strong supply & demand dynamics which have shown no sign of letting up, June’s pullback proved to be the perfect entry point for this institution.
iShares High Yield Corporate Bond ETF (HYG) Puts
It can’t all be sunshine. With the market on edge, Jon is looking at a truly enormous bearish put trade in the (HYG). Looking out to September, a buyer picked up 100,000 of the $68 strike puts, paying $1.01 per contract.
“High Yield” is essentially a euphemism for low quality credit. This buyer likely believes that there is a high risk of credit defaults looming in the market. This is a trend that we’ve already started to hear from Ford, and that Jon Najarian believes we will likely hear from other companies going forward. If we start to hear that bankruptcies and defaults are on the rise, the HYG and low quality credit as a whole will be in trouble.
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