Trading Diary Sept 19th – Sept 23rd

by Dan September 25, 2011 9:49 pm • Commentary

The last 2 weeks have been a delight for most traders, those that were not saddled with large positions that they have to defend, but those nimble enough to be able to play definable trading ranges while not being too stubborn.  There have been catalysts that you could put your finger on (FOMC meeting) and tape bombs (most associated with Greek bailout) that could move the market 1-2% without a thought…..The bank short has been an easy one and even when the market was up 5% in the week prior to last these things barely participated, and when the market dropped 5% last week they made new lows….some of this is becoming quite predictable and even me who has been fairly skeptical of the markets all summer is starting to get a little weary of staying too negative after the next swoosh below 1100.  

All that said, for the better part of last week I sat on my hands until things settled down…..Let’s recap: I have spent the better part of August and so far this Sept actively trading the SDS (the SPY double short etf) as I get a lot of bang for my buck in this period of increased volatility…..So I am always trading SDS and usually buying more at the top end of the trend channel we have been in near 1200 and covering on the one down to 1120/30…..I have remained long BAC Jan 5/2.5 put spread, JPM Oct 30/25 put spread and XLF Oct 12/11/10 Put Fly, but on Thursday’s close I reduced the position by half.  I think the financials, while very oversold, have one last puke in them before they can rally…I think we will see surprising levels in some, BAC at 5, C at 19, JPM at 25, MS at 11 and GS at 75-80……all this will likely be met with a furious V reversal……This is what many expected with the Buffett investment a few weeks back in BAC, but then sanity set in again and we remembered that we have a full on debt crisis and Europe that is not far off from spreading….

I took a shot on a very short term, low premium, defined risk trade into ORCL‘s earnings and got the direction wrong, which is fine with me and my style…….and I generally don’t believe their strong guidance, especially if we are really headed into a double dip….this leads me to my DIA Oct 105/100/95 Put Fly….I think the Dow Jones will play catch up to Europe in the coming weeks, the DAX is down 25% ytd and the Dow Jones Industrial Average which has more than half of its components receiving more than 25% of their revenues from Europe is only down 7% ytd….I bring this up because ORCL has more than 30% revenue contribution from Europe, 15% from financial services and 15% from Govt……I don’t get it, either things are much better in Europe than the broad indices suggest, or ORCL’s management are not being all that honest….only time will tell.  I like this trade alot….. As we are on the bottom end of this trend channel (below), I wanted to add some long exposure on some names that I thought were extremely oversold and have potential catalysts that could take them off multi year lows…..

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In market like these, with heightened volatility and great uncertainty I think in most cases, especially on those of a speculative nature, it makes sense to use long premium bets to define your risk. On Friday, I bought a Nov 80/95 Call Spread in FSLR, a HPQ Jan 24/29 Call Spread, and a RIMM Mar12/Jan13 25/32.5 Call Spread and bought common stock in Sprint at 3.03 and 3.11.  All of these trades fall into more of a speculative trading bucket, and are not meant to be fundamental longs, they are catalyst longs and all 4 names are particularly distressed.  So I am not saying because the market is down 20% since April to go in and buy all the crap that is down the most, but I am trying to find beaten up stories that could provide asymmetric returns if I get the story right plus the direction of the market from a both oversold conditions.

When I breakdown the trades above I try to think about what I would do if I were management in each case…..HPQ is pure sentiment, and while the Street is puking the name, at some point cooler heads will prevail from a 6 year low, and when the news gets less bad the stock will fill in the latest gap.  FSLR is not to different, purely sentiment and I like the risk/reward of the spread…..In the case of RIMM, if I were this management I would start doing the opposite of everything that I have done over the last year or so….But ultimately I would find a buyer and try to get some scale behind their platform before they become irrelevant…..for the founders of the company to go down with the ship like this is downright embarrassing and borderline criminal when you consider the shareholder value they have destroyed due to their inability to keep up with innovation and a whole host of bonehead strategy moves….

So the net of it is, I tried not to over-trade in single stock names and traded the ranged primarily in index options or etfs, always using stops and trying not to get to stubborn…..