Don't Pile Into Those ROBO Call Options Just Yet

Option volume on the robotics ETF is growing fast, but the slippage risk is still substantial

Sep 26, 2017 at 2:07 PM
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The ROBO Global Robotics & Automation ETF (ROBO) still maintains a pretty low profile with investors, despite racking up a banner 2017. ROBO shares have gained about 34% year-to-date, and the fund -- which started trading in October 2013 -- topped $1 billion in assets under management in early August. The fund's ascent has been supported by massive inflows; per, ROBO's AUM ballooned by 738.1% in the year-to-date period through Sept. 12.

The explosion in ROBO share volume has been roughly as dramatic as you might expect, based on the above. Total monthly share volume for September 2016 arrived at just 425,350 -- but by July 2017, that figure stood north of 12 million. And already this month, more than 7.5 million ROBO shares have traded. That puts the fund on pace for a September 2017 total in the neighborhood of 10 million, representing about 23 times the year-ago figure.

Notably, even though the fund has yet to attract anything approaching an onslaught of attention in the financial media, the ROBO ramp in 2017 has occurred in the face of some skepticism -- which obviously appeals to our contrarian sensibilities. Back in May, a Reuters analysis dismissed ROBO as "due for a pullback," with "attempts at further gains" expected to "prove futile" in the face of one-year channel resistance at $35.20.

And in fact, this gloomy analysis held up just fine over the short term, with an ensuing ROBO rally attempt petering out around $35.50 -- just north of the stated channel resistance -- in the early days of June. But as the calendar flipped from July to August, a blowout earnings report from ROBO component Cognex (CGNX) helped propel the shares above this resistance level. From there, it was a quick trip up to the aforementioned $1B AUM milestone -- and next, to the shares' Sept. 20 all-time high of $38.79.

Meanwhile, option volume in the name is beginning to take off, just a few months after the contracts became available to trade (officially, in late June). Friday marked a new high for ROBO's total open interest and call open interest, at 548 and 531 contracts, respectively. (Yes, roughly 97% of ROBO open interest is on the call side.)

But before we all run screaming into ROBO calls of our own, there's good reason to take a wait-and-see approach right here. First, the ETF's recent high occurred just shy of the round $40 level, which could prove a tough technical nut to crack -- particularly with the $40 area representing roughly double the February 2016 lows. Plus, ROBO's 60-day moving average has provided key support on pullbacks this year, and on three occasions so far in 2017, the shares have pulled back after rallying more than 5% above this trendline. And at last Wednesday's intraday peak, ROBO was nearly 8% above its i60-day.

Given the key role CGNX earnings played in the early August breakout, the "off-peak" season we're now entering for quarterly reports is yet another factor in favor of a period of relatively quiet price action for ROBO in the immediate future. Beyond that, of course, there's also a very practical concern. With ROBO option volume still running very light on an absolute basis, the bid/ask spreads on this ETF's contracts can often be measured in full points, not pennies -- meaning the "slippage" in this scenario is substantial enough to result in the options trading equivalent of a full-on faceplant.

robo daily open interest 0922

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 24.

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