If revenge travel sentiment is fading, that might not be great news for theme-park operator SeaWorld Entertainment (SEAS). Even worse, major options traders – the so-called smart money – appear to be sensing brewing troubles for SEAS stock and the broader entertainment landscape, warranting a cautious approach.
On a purely cynical basis, the COVID-19 crisis offered a lucrative bounce-back opportunity for speculators. To be sure, the sudden loss of market demand when the pandemic first capsized western economies clearly represented a negative event – there’s no polishing this ugly mess. However, SEAS stock eventually regained its early February 2020 form and then some.
On a trailing five-year basis, SEAS stock swung up roughly 62%, which is a decent performance given the volatility and uncertainty of the pandemic-disrupted ecosystem. Nevertheless, with stubbornly high inflation along with escalating borrowing costs crimping consumer sentiment, fewer households have the discretionary funds to comfortably afford entertainment experiences.
At the same time, the global health crisis also sparked significant behavioral shifts. For example, pet adoption rates increased worldwide as loneliness rose during the quarantine periods. Thus, it makes sense that consumers have prioritized social-experience-related expenditures over the acquisition of physical goods, the “funflation” phenomenon.
Sadly, though, SEAS stock just hasn’t been able to generate positive momentum this year. Since the January opener, it lost more than 22% of equity value. Worse yet, the options market seems to be signaling an anticipation of further volatility for the theme park.
Unusual Options Activity for SEAS Stock Could Be a Sector-Wide Warning
Following the close of the Oct. 30 session, SEAS stock represented one of the “highlights” in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 7,586 contracts against an open interest reading of 12,237 contracts. Moreover, the delta between the Monday session volume and the trailing one-month average metric came out to 820.63%.
What was more striking, however, was the transactional breakdown. Call volume only mustered 93 contracts, while put volume stood at 7,493 contracts. This pairing yielded a put/call volume ratio of 80.57, indicating substantial interest in puts – which give holders the right but not the obligation to sell the underlying security at the listed strike price – over calls.
Of course, from a face-value reading, this framework seems awfully bearish. However, it’s also important to note that for every option contract bought, someone must be willing to sell the option (or basically underwrite the risk). If an imbalance occurs between who is doing the buying (say, thousands of individual retail investors) versus who is doing the selling (i.e. a select few institutional traders), the put/call ratio can be deceptive.
Regarding what happened in the derivatives market on Monday, though, we have reasonable confidence that retail traders have represented the primary driver for demand associated with the aforementioned puts. Notably, the Nov 17 ’23 40.00 Put saw a volume surge of 3,727 contracts. However, Fintel’s options flow screener – which exclusively targets big block trades – shows no major institutional activity on Oct. 30.
Over the trailing five sessions, SEAS stock gained 2% in the open market. That contributed to a “negative” change in the $40 put’s delta, yielding a lower contract price. However, it appears that retail traders assume the forward trajectory of SEAS is negative. Therefore, they likely believe the put contract’s reduced price is a bargain; hence the spike up in demand.
Fundamentally, the bearishness in SEAS stock could symbolize a sector-wide warning for the broader entertainment industry. While consumers have been piling into funflation experiences, eventually, the expenditures must die down. When it does, SeaWorld could suffer from demand erosion.
Overheated Economy Could Cool Down
Now, on surface level, investors might view the negativity in SEAS stock as merely retail-related speculation. While that was true on Monday, that’s not exclusively the case for all other sessions. Indeed, options flow data notes that earlier in October, institutional traders began selling call options, which generally point to a pessimistic outlook.
Basically, with sold calls, the traders underwriting this risk are betting that the underlying asset won’t rise to the listed strike price. And if it doesn’t, the writers of the calls can collect maximum premium for their daring wager.
Also, despite the incredibly powerful print in the U.S. economy – with third-quarter GDP posting gangbuster growth – fears have also risen that the country cannot maintain this robust trajectory. As a CNBC report pointed out, the bond market since last year has been broadcasting strong signals that it believes a recession is coming.
Indeed, bearishness in the entertainment ecosystem could be yet another warning that something isn’t quite right.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
