Unusual Stock Options Volume Suggests Some Traders Are Prepping for a Recession

While Americans generally tend to be an optimistic bunch, recent options trading dynamics suggests that at least a few investors anticipate a recession will soon materialize. Specifically, interest toward household goods giant Kimberly-Clark Corp (KMB) spiked, which is unusual. Known for its toilet paper products and other personal care items, KMB stock isn’t exactly what you call a thrilling market idea.

At the same time, a spike in demand for its call options (relative to puts) suggests that investors may be taking a defensive posture. Fundamentally, such a thesis wouldn’t exactly arouse much surprise. Since the November jobs report – which came in much hotter than anticipated – the equities market has been on a downward trend.

For instance, against the trailing five days since the Dec. 7 close, the benchmark S&P 500 index slipped nearly 4%. Ordinarily, a robust print in employment data would represent cause for celebration. However, it also means at a basic level that more dollars are chasing after fewer goods. In contrast, the Federal Reserve seeks to facilitate the opposite circumstance: fewer dollars chasing after more goods.

Stated differently, all the monetary tightening measures that the central bank implemented to combat inflation fell flat. Unfortunately for those hoping for a quick market recovery, monetary policymakers will really need to take the gloves off. Therefore, higher interest rates in 2023 may be the norm, boding poorly for growth-oriented names.

On the other hand, this framework cynically supports entities like KMB stock. Should the economy fall into a recession, consumers will invariably focus their expenditures on the essentials, leaving whatever else (if anything) toward discretionary items or services. Thus, Kimberly-Clark would be near the top of the expenditure food chain, incentivizing bullish exposure to KMB.

Options Traders Bid Up KMB Stock

Following the conclusion of the midweek session, KMB stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Primarily, traders advantage this data to determine which stocks may be due for big moves ahead.

Specifically, KMB’s volume hit 22,834 contracts against an open interest reading of 65,682. Call volume hit 22,217 versus put volume of 617. The implied volatility (IV) rank hit 16.43%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To quickly summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for KMB stock was 14.90% on Dec. 2, 2022. Earlier, on Oct. 12, KMB hit its IV high at 30.84%. Prospective investors should note that per Barchart.com’s technical analysis gauge, it ranks as an average 40% buy. While Kimberly-Clark lost about 4% of equity value on a year-to-date basis, it gained 9.7% in the trailing month.

As well, the November jobs report interrupted the bullishness in the broader equities index, possibly contributing to the KMB’s IV fluctuations. However, with the fundamentals seemingly confirming a slow economic cycle ahead (due to potential interest rate hikes), KMB stock looks much more interesting at the immediate juncture.

Kimberly-Clark to Benefit From Inelastic Demand

Fundamentally, what separates KMB stock from most growth-centric investments is inelastic demand. Irrespective of pricing fluctuations, products that feature inelasticity benefit from consistent and predictable demand. The same cannot always be said about growth-driven enterprises as they tend to cater to discretionary frameworks.

Why this dynamic matters is because the Fed can’t have its cake and eat it too. While the central bank can eventually control inflation through higher rates, the subsequent spike in borrowing costs will lead to demand erosion across several industries. Unsurprisingly, some of the biggest and most innovative enterprises recently announced layoffs.

Should the Fed get serious about inflation, it may also need to accept the likelihood that price reduction won’t materialize without the shedding of economic blood.

Still, unless the economy devolves into an apocalyptic scenario, people need basic goods to care for themselves. With traders recognizing this reality, the usually boring KMB stock just got a whole lot more exciting.

• Stocks Weighed Down by Global Economic Concerns
• Stocks Under Pressure as Weak Chinese Trade News Sparks Global Growth Concerns
• Markets Today: Stocks Mixed On Negative Chinese Trade News
• Stocks Retreat on Tech Weakness and Warnings from Bank CEOs