Video game stocks Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) were the subject of bullish brokerage notes today, and are trading higher as a result. Traders looking to take advantage of the price action may want to do so with options, which are attractively priced on both stocks at the moment. 

Electronic Arts Stock Rallies Off Double-Barreled Support

At last check, Electronic Arts stock was up 0.4% at $130.40, after the regulatory filings revealed Third Point and Jana Partners took stakes in EA. In addition, SunTrust Robinson issued a price-target hike to $140 from $135, which sits north of last Friday's record high of $134.58. Overall, the shares have added 24% in 2018, with the recent pullback contained by both the 160- and 200-day moving averages.

The bullish analyst attention is nothing new for EA. Exactly 80% of brokerages covering the security rate it a "buy" or "strong buy," with not a single "sell" on the books. Plus, the stock's average 12-month price-target of $143.24 is a 10% premium to EA's current perch. 

It's also worth noting that EA stock currently sports a Schaeffer's Volatility Index (SVI) of 24%, which ranks in the 16th percentile of its annual range. This suggests that near-term options are pricing in relatively low volatility expectations at the moment, which could help maximize the benefit of leverage for premium buyers.

Morgan Stanley Boosts Its ATVI Stock Bull Case to $100

Activision Blizzard stock also received bullish analyst attention this morning, with Morgan Stanley raising its bull case to $100 -- citing growing popularity of the company's Overwatch League. At last check, ATVI stock was up 0.7% to trade at $70.70 in response. The shares briefly pulled back after racing to a record high of $79.63 on March 12, but have since bounced from support at their 200-day moving average, a trendline that caught a previous pullback in December. 

In the option pits, traders have been more bearish than normal in recent weeks. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the security with a 10-day put/call volume ratio of 0.75, ranking in the elevated 79th annual percentile. While the low absolute ratio indicates more calls than puts have been bought to open, the high percentile suggests the rate of put buying has been accelerated relative to call buying lately.

Regardless of direction, those purchasing premium on the video game stock are in luck. The stock's SVI of 26% ranks in just the 11th annual percentile, suggesting short-term options are cheaper than usual, from a volatility standpoint.

Apple Inc. (NASDAQ:AAPL) blew up a lot of bear cases a few weeks back by posting better-than-expected quarterly results, and the stock continued to rally in the days that followed thanks to Warren Buffett's upbeat outlook. AAPL eventually hit a record high of $190.37 a week ago, and was last seen just below this mark at $187.48, bringing its year-to-date gain to nearly 11%. But while it may seen prospective options traders may have missed the Apple breakout, data suggests the iPhone maker could still be a strong target for call buyers.

Specifically, the security showed up on a list of names that have outperformed on the charts, yet have low volatility premiums for near-term options, measured by our Schaeffer's Volatility Index (SVI). This indicator for AAPL comes in at 18%, and ranks in just the 15th annual percentile. Said simply, it could be a good time to buy short-term options contracts.

According to Schaeffer's Senior Quantitative Analyst Rocky White, Apple has been in a similar position three other times since 2008, meaning it was trading near its 52-week high and had a low SVI. Looking at one-month returns after such "signals," the shares ended positive twice.

And although it would seem the tech giant has at least momentarily put fears of slowing iPhone growth to rest, there are a tony of Apple skeptics still hanging around. Most notably, almost half the analysts covering the stock have "hold" or "sell" ratings, and the average price target is just $195.96 -- a measly 4.4% premium to current levels. Considering all this, we could see more bullish brokerage notes come through and drive the equity even higher.

Deere & Company (NYSE:DE) is expected to report fiscal second-quarter earnings ahead of tomorrow's open. The stock has a history of positive earnings reactions -- closing higher in the session subsequent to the tractor maker's results in six of the past eight quarters. One options trader appears to be expecting on more of the same, but took a cautious approach to their bullish bet.

Specifically, it looks as if a long call spread was initiated last Friday on DE, with one trader buying the weekly 5/25 150-strike call and selling the 160-strike call for an initial net debit of $2.29 per spread, or $641,200 (2,800 contracts * premium paid * 100 shares per contract). The short call lowered the cost of entry of buying a call outright, while also dropping the breakeven mark to $152.29 (bought call + net debit).

However, the options trader has also forfeited the unlimited profit potential of a long call purchase. The maximum potential gain for this long call spread is limited to $7.71 per spread (difference between the two strikes less the net debit), no matter how far above $160 the stock may rise by expiration at next Friday's close.

At last check, DE stock was trading up 0.2% at $147.66. The shares have added 8.9% so far this month -- thanks to a sharp bounce off their 320-day moving average -- and appears to be forming an inverse "head and shoulders" pattern. Longer term, Deere shares are down 6% year-to-date.

 

Oil prices are on the rise today, with June-dated crude futures up 0.1% at $71.61 per barrel at last check. Energy stock Callon Petroleum Company (NYSE:CPE) is higher, too, gaining 4% to trade at $14.17.

This positive price action echoes the stock's longer-term trend, with CPE adding 16% in 2018. More recently, the stock pulled back to its 40-day moving average after hitting an annual high of $14.65. This could have bullish implications for the stock based on previous signals, and now may be the time to buy the CPE dip.

Over the past three years, there have been six occasions where CPE has come within one standard deviation of its 40-day moving average after an extended stint above this trendline, according to Schaeffer's Senior Quantitative Analyst Rocky White. One month later, the security was higher 83% of the time, averaging a return of 9.35%.

Should Callon Petroleum stock -- which flashed a different buy signal just last week -- continue to rally, an extended short squeeze could help keep the wind at the equity's back. Short interest fell by 3% in the most recent reporting period, yet the 40.09 million shares still sold short represent nearly 20% of CPE's total available float -- or 9.8 times the average daily pace of trading. 

And those wanting to bet on more upside for the oil stock may want to consider options. Specifically, CPE's 30-day at-the-money implied volatility of 40.6% ranks in the 10th percentile of its annual range. In other words, the equity's short-term options are relatively cheap at the moment, from a volatility perspective.

It's been a volatile two-year stretch for Kroger Co (NYSE:KR). In fact, KR has a Schaeffer's Volatility Scorecard (SVS) of 89, which shows it's consistently made bigger moves than the options market was expecting over the past 12 months. This choppy price action is continuing today. The stock was up as much as 5.7% earlier, but was last seen trading just 1.6% higher at $25.34, following news the company made a deal with online grocery retailer Ocado to use the Britain-based company's delivery technology in the U.S. Kroger will take a 5% stake in Ocado as part of the agreement.

Clearly, it wouldn't be surprising if the $26 level -- site of two gaps since November -- proves to be short-term resistance for the security. KR has also been plagued by enormous interest from short sellers. In the last two reporting periods alone, short interest increased 82.4%, and the short interest ratio has moved up to 7.00 -- what we could deem an elevated level. On the other hand, an extended breakout above the $26 level could result in a short squeeze situation where the shares potentially revisit the $30-$31 region that's marked the peak of their past two rallies.

Either way, the stage appears to be set for Kroger to make a big move in either direction. Options traders are betting this occurs to the downside, according to the equity's 10-day put/call volume ratio of 1.88 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This reading ranks in the bearish 80th annual percentile.

Puts are popular today, too, more than doubling their call counterparts so far. Most popular is the July 26 put, followed by the soon-to-expire May 25.50 put. Data on both contracts suggests buy-to-open activity could be taking place, which would mean traders are betting against Kroger. Either way, it's a good time buy premium, based on KR's Schaeffer's Volatility Index (SVI) of 28%, just nine percentage points from an annual low.

While many are betting against the grocery chain, financial publication Barron's just featured a bullish write-up on the stock, saying it could rally back to $30 in the next year. Elsewhere, Schaeffer's Quantitative Analyst Chris Prybal recently pointed out how Kroger's price-to-book value per share ratio is hovering just above 3. The last time the metric fell to this level was back around October when the stock bottomed near $20. Keep in mind the company's name has been tossed around on the M&A front, too.

Shake Shack Inc (NYSE:SHAK) hit a two-year high of $59.91 earlier, and was last seen trading up 2% at $59.80. With the shares holding near this peak -- and implied volatilities low after the company's early May earnings report -- it could be time to bet on SHAK stock's next leg higher.

Specifically, the equity's Schaeffer's Volatility Index (SVI) of 32.1% ranks in the 14th annual percentile, suggesting short-term options are relatively cheap at the moment. Plus, the last time SHAK was trading near 52-week highs while its SVI was ranked in the lower fifth of its annual percentile, the security was up 13.87% one month out. While the sample size is small, another move of similar magnitude would put Shake Shack north of $68 for the first time since August 2015.

The shares already boast an impressive year-to-date gain of 38%. And earlier this month, SHAK gapped 18% higher in the wake of its strong first-quarter results. In fact, the equity is pacing for its best month since April 2015.

There's an ample amount of skepticism being priced into the outperforming stock, too, which could translate into tailwinds on an unwind. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), SHAK's 10-day put/call volume ratio of 1.46 ranks in the 89th annual percentile -- meaning puts have been bought to open over calls at a quicker-than-usual clip.

Plus, short interest jumped 10% in the two most recent reporting periods to 7.78 million shares. This represents 38.15% of the stock's available float, and would take nearly three weeks to cover, at Shake Shack's average daily pace of trading.

A round of upgrades and/or price-target hikes could draw more buyers to the table as well. Of the nine analysts covering the shares, six maintain a "hold" or worse recommendation, while the average 12-month price target stands at a low $49.80.

Since May 8, when President Donald Trump announced the U.S. would withdraw from the Iran nuclear deal, the Energy Select Sector SPDR Fund (NYSEARCA: XLE) has been on fire. With oil prices surging amid concerns about Iran sanctions, the energy exchange-traded fund (ETF) is pacing for its 10th straight win -- which would mark its longest win streak since 2006. So, is the oil fund about to cool off, or could XLE extend its trek higher?

XLE Eyes Best Quarter Since 2011

At last check, XLE was up 1.2% to trade at $78.47. Earlier today, the ETF notched a nearly three-year peak of $78.83, poking north of a former ceiling in the $78 area, which contained rally attempts in late 2016 and January 2018. After jumping 9.5% in the month of April, the XLE is up another 6.3% so far in May, and is pacing for its best quarter since late 2011.

Only One Other 10-Day Win Streak

July 2006 was the only other time ever in which XLE shares rallied for 10 straight days. Specifically, the fund surged 13.29% in that time frame. However, that surge preceded an 11.66% pullback over the subsequent three months, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

Finding the 'Sweet Spot' After Big Rallies

Since such a small sample size provides very few clues as to what could be the fund's short-term trajectory, we decided to take a look at what happens after XLE enjoys a winning streak of seven days or more. Since 2000, there have been 17 of these instances, the last occurring in October 2015. Again, that strong uptrend preceded a rough three-month stretch for the fund, which fell 20.44%.

However, from a broader perspective, strength has beget strength for the Energy Select Sector SPDR Fund. A day after the winning streak was snapped, the XLE was up 0.28%, on average, and higher 64.7% of the time. That's compared to an average anytime one-day gain of 0.04%, with a win rate of 52.3%, looking at data since 2000.

One month later, the ETF was up another 2.69%, on average -- roughly three times its average anytime one-month gain of 0.67%. Further, XLE shares were in the black 70.6% of the time a month after ending a win streak of at least seven days. That's compared to an average anytime one-month win rate of 56.4%.

Three months later, XLE was up 2.48%, on average -- slightly lower than its one-month return, but still handily above the fund's average anytime three-month return of 1.91%. As such, it looks like the "sweet spot" to jump in on XLE is about a week after it snaps a lengthy win streak, as the shares tend to outperform again in the short term.

Still, it should be noted that XLE is coming up on a historically bearish time of year. Since inception, the fund has averaged a loss in the months of June, July, August, and September, according to Schaeffer's Quantitative Analyst Chris Prybal. For traders spooked by seasonality, consider shorter-term plays on individual oil stocks, with Whiting Petroleum (WLL) and Callon Petroleum (CPE) among those recently flashing "buy."

Unless you've been living under a rock, you're probably aware that Britain's Prince Harry and American actress Meghan Markle are getting married at Windsor Castle this weekend. The couple's nuptials are expected to inject more than $1.4 billion into the U.K. economy, with much of that stemming from tourism -- a possible boon for travel stock TripAdvisor Inc (NASDAQ:TRIP). Meanwhile, Dunkin Donuts parent Dunkin Brands Group Inc (NASDAQ:DNKN) is giving a nod to the couple with a limited-time offering of the Royal Love Donut. And, perhaps more importantly, both TRIP and DNKN stocks have quietly muscled higher lately, and could attract more bulls.

Many people -- namely American anglophiles -- have paid big bucks to travel to England for the festivities. That could be good news for TripAdvisor. Earlier this month, the stock gapped higher on well-received earnings, and is now attempting to find support in the $46-$48 area -- a neighborhood that's acted as resistance in the past. TRIP shares were last seen trading around $48.25, up more than 57% in the past six months.

A short squeeze could help TRIP extend its breakout, too. Short interest represents nearly 19% of the stock's total available float, or more than two weeks' worth of pent-up buying demand, at the security's average trading volume.

Plus, analysts have yet to capitulate. Despite TRIP stock's surge in 2018, just one analyst considers it worthy of a "buy" or better rating, compared to 22 brokerage firms maintaining tepid "hold" or worse recommendations. A round of upgrades could also lure more buyers to the table.

Will Dunkin make a killing on its Royal Love donut? Probably not, but the stock is still worth watching -- especially as there's plenty of room on the bullish bandwagon.

Dunkin Brands stock touched a record high of $68.45 in late January, before pulling back in the broader stock market correction. However, DNKN shares found support in the form of their 200-day moving average, and they've now added more than 15% in the past six months. At last check, Dunkin stock was fairly close to its all-time high -- and back in the black on a year-to-date basis -- docked at $65.82.

As with TRIP, Dunkin stock has yet to convince the skeptics. Short interest grew 14.5% in the most recent reporting period, and now accounts for 14% of the stocks' float. At DNKN's average pace of trading, it would take almost two weeks to repurchase these pessimistic positions -- plenty of fuel for a short-covering rally.

Meanwhile, not even half of the 18 analysts following the breakfast concern deem it worthy of a "buy" endorsement. Upgrades in the wake of DNKN's recent rally could be a tailwind for the shares.

What's more, an unwinding of skepticism in the options pits could also be a boon for Dunkin. The stock's Schaeffer's put/call open interest ratio (SOIR) sits at 2.19 -- at the very top of its annual range. This indicates that near-term options traders haven't been more put-biased on DNKN in the past year.

"If a pullback occurs this expiration week, bulls want to see support on the SPY come into play between $266.86 -- its 2017 close -- and the $270.43 level... there is the possibility that the 275 strike acts as a magnet, as sellers of the calls are forced to buy S&P futures to maintain a neutral position in a process called delta-hedge buying.. The risk this week is the SPY trading below the 272 and 275 strikes. In this instance, the longer it remains below these strikes, the more apt that long S&P futures positions at 272 and 275 are unwound, creating a modest headwind."
-- Monday Morning Outlook, May 14, 2018

With the SPDR S&P 500 ETF Trust's (SPY - 271.33) intraday high at $274.08 occurring on Monday of last week and its low on Tuesday at $270.03, the exchange-traded fund (ETF) designed to closely mimic the S&P 500 Index (SPX - 2,712.97) behaved much as we expected, from both a technical and options-related perspective.

I was surprised, given the SPY high occurred so early in the week, that the $275 level was not touched. But the Tuesday low was pretty much in line with expectations, as it occurred at a round level that coincides with the SPX 2,700 century mark, and less than half a point away from the March 21 Fed-day close of $270.43. Long-time readers of this commentary are fully aware that closing levels around the time of Federal Open Market Committee (FOMC) meetings tend to act as resistance in the immediate aftermath of a rate hike, while decisions to hold rates steady have been more bullish from a short-term perspective.

Whether you are focusing on post-FOMC resistance at $270.43 or the triangle/trendline on most technicians' screens that connects the January and March highs and February-May lows, bulls should remain encouraged by the SPY price action since early May, which marked the beginning of a weak seasonal period for equities.

If you move outside the large-cap spectrum and into the small-cap spectrum, bulls should also be encouraged by the fact that the Russell 2000 Index (RUT - 1,626.63) took out its January all-time closing high at 1,610, which coincides with a round 10% above the February closing low, to notch another new all-time high.

"One scenario is the SPY rallying into mid-June and testing the mid-March highs at $280... Currently, fed funds futures players are factoring in a 100% probability of a rate hike on June 13. If the market rallies into this meeting, I could see a scenario in which the sentiment landscape is not nearly as negative relative to that which preceded the May 2 FOMC meeting. In other words, market participants could become more comfortable with stocks on the eve of a June rate hike, which has tended to precede weakness in stocks the following month."
-- Monday Morning Outlook, May 14, 2018

While the RUT made new highs last week, not much changed with the SPY, as it traded slightly lower on the week. After a promising Monday, stocks opened lower on Tuesday due to surging 10-year Treasury yields that surpassed the late-April highs. I think the unwinding of long S&P futures positions associated with the heavy overhead calls at the 272 and 275 strikes likely dampened the SPY's ability to mount a significant rally for the balance of the week.

With May options expiration behind us, and sentiment growing more optimistic after the technical breakout last week, the scenario excerpted above from last week's commentary is still a possibility. In fact, the graph below might be one of the better illustrations of the manner in which negative sentiment is unwinding, as the 10-day equity-only, buy-to-open put/call volume ratio is already below 0.50 after peaking at 0.65, a multi-month high, just one day after the May 2 FOMC meeting.

The declining ratio is supportive of stocks as pessimism is unwound. Moreover, there is the possibility that the ratio bounces around at previous lows into the next FOMC meeting in mid-June. While the relatively low reading is a risk to the bullish case at present, I think it becomes a bigger risk if such optimism is on display ahead of the mid-June FOMC meeting, when it is likely the Fed raises rates again.

But keep in mind that FOMC minutes from the last meeting are set to be released on Wednesday. If there is anything in the minutes that surprises the Street, this could be enough to halt the current rally and generate choppy trading activity into the June meeting.

Remember, the stock market has tended to struggle in the four weeks following a rate hike during the current tightening cycle. And if short-term market participants are enthusiastic prior to a rate hike, it could spell short-term trouble for stocks beginning in mid-June. And it was this same group of speculators that was pessimistic prior to the Fed holding rates steady, even though the following four weeks have generally been bullish after the Fed holds rates steady.

Continue reading:

• Indicator of the Week: Volatility Signal Not Seen Since 2009
• The Week Ahead: Retail Earnings, Fed Minutes on Deck

Retail earnings will continue to trickle in this week, with department store chain Kohl's Corporation (NYSE:KSS) scheduled to report its first-quarter results before the market opens tomorrow, May 22. KSS stock has averaged a next-day move of 6.9% over the past eight quarters, yet this time around, the options market is pricing in a much larger next-day move of 11.6%, regardless of direction, based on implied volatility data.

Heading into the event, options volume has picked up today, with roughly 5,000 calls and 5,300 puts crossing the tape -- double the average intraday rate. KSS' weekly 5/25 69.50-strike call is garnering notable attention, with new positions being opened. If these calls are being bought, traders are wagering on post-earnings upside from KSS shares through the end of this week, when the contracts expire. Meanwhile, the January 2020 50-strike put is most popular, and it looks like one trader may have sold the puts to open to bet on a long-term floor for Kohl's shares.

Although KSS stock's recent history of earnings reactions has been negative -- the shares have closed lower the day after their report in three of the last four quarters -- the equity today is set for its highest close in weeks. The security is up almost 20% in 2018, and was last seen trading 1.8% higher at $64.61. The retail stock has relied on support around the $58 level all year, which is home to a 38.2% Fibonacci retracement of KSS' rally from its 2017 fourth-quarter low to its late-February two-year high at $69.48.

Should Kohl's deliver an upbeat earnings report, a short squeeze could provide tailwinds for the equity. Short interest increased by nearly 10% in the most recent reporting period to 29.77 million shares, the highest since mid-December. This represents nearly 18% of KSS' total available float, and almost nine days of pent-up buying power, at the stock's average daily trading volume.

Retailer Urban Outfitters, Inc. (NASDAQ:URBN) is slated to report first-quarter earnings tomorrow after market close. On the charts, URBN has been on a tear, gaining 116% over the past 12 months, and on Friday reached a three-year high of $43.18. The stock has enjoyed support from the rising 30-day moving average since mid-February.

Digging into earnings history, URBN has posted a positive return the day after five of the company's last eight reports, including the past three. Overall, the stock has averaged a post-earnings swing of 8.7% of the past two years, regardless of direction. This time around, the options market is pricing in a 14.1% next-day move, per data from Trade-Alert. From the equity's current price of $42.01, a move of this magnitude to the upside would put the shares just under $48 -- into record-high territory.

Looking towards the options pits, traders have been heavily bullish ahead of the company's earnings release, with data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) showing a 10-day call/put volume ratio of 2.54, ranking in the 88th annual percentile. This shows URBN calls have been purchased over puts at a faster-than-usual clip.

What's more, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.35 ranks in the low 3rd percentile of its annual range. In other words, speculative players have rarely been more heavily skewed toward calls over puts, looking at options that expire in the next three months.

Analyst sentiment has been mixed, with 10 of the 18 brokerage firms following the retailer sporting "hold" or worse ratings. However, Urban Outfitters just this morning received a price-target hike to $47 from $42 at SunTrust Robinson.

Animal drug maker Zoetis Inc (NYSE:ZTS) made headlines last week, after announcing plans to buy Abaxis (ABXS) for about $1.9 billion. ZTS shares have moved higher since the announcement, and are back within striking distance of new record highs. Nevertheless, near-term options on the biotech can still be scooped up at a bargain -- sending up a buy signal that has yet to be wrong for Zoetis stock.

At last check, ZTS was up 0.9% to trade at $85.17 -- not far from its April 18 all-time high of $86.38. Earlier this month, the shares gapped lower after earnings, but found support at their 100-day moving average. Pullbacks to this trendline have marked buying opportunities for Zoetis stock over the past year, during which the shares have rallied more than 41%.

In the wake of the security's post-earnings volatility crush, its Schaeffer's Volatility Index (SVI) of 16% stands in just the 11th percentile of its annual range. In simpler terms, the stock's short-term options are attractively priced, from an implied volatility standpoint.

Since 2008, there have been five times in which ZTS shares were trading close to an annual high while simultaneously sporting an SVI in the bottom 20% of its annual range. After each of those prior signals, the pharma stock was higher one month later across the board, averaging a healthy gain of 4.9%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar rally from current levels would put Zoetis stock around $89.34 -- well into uncharted territory.

Speculators expecting another short-term pop for ZTS could consider the June 85.50 call, which is currently asked at $1.50. Buyers of the call would profit the higher Zoetis stock surges north of $87 (strike plus premium paid) by the close on Friday, June 15, when the newly front-month options expire.