Trading Diary: Nov 7th – Nov 11th

by Dan November 13, 2011 9:11 pm • Commentary

Last week our equity markets saw an almost 4% peak to trough move,  that ended settling up about 1% for the 5 day period.  The mid week swoon was largely caused by the uncertainty facing Italy’s then Prime Minister’s ability to deliver on a budget that would ensure their much needed participation in any Euro-Zone bailout.  By Friday morning it appeared that Berlusconi was out and that whoever followed would have the backing of Parliament and the people and thus able to make the appropriate austerity pledges to their “overlords” in the North.  The markets calmed and ended the week with 2 consecutive decisive rally days, albeit on low volume (at least Friday), but placing all of our major equity indices in the black for the year.  I remain a bit cautious on the rally, but conceded that any significant progress in Europe’s effort to “kick the can down the road” as it relates to their debt crisis could set off a rally into year end and testing the highs made last Spring.

As for my trading, I continue to focus on individual stories, because if you took the entirety of what I think I know with any sort of certainty about the debt crisis in Europe you could probably fit it into a little espresso mug, not even a double.  I guess my point is that’s all anyone on TV and on the web wants to talk about at the moment as it relates to the markets, that’s all fine and good, but I have no edge when it comes to the probability of the potential outcomes, so I will stick to what I think I can get some sort of edge on; identifying mis-priced individual stories and use options to define my risk and make calculated plays around events.  

For my trading, last week started out with the sort of situation that I have not been involved with since the site’s inception and was detailed by RiskReversal’s most recent contributor, Andrew Rosen.

On Monday following AMGN‘s announcement of a dutch tender offer with the stock at $57.59 I bought the Dec/Jan 60 Call Calendar for .52 (read here).  What I liked abou this trade was the defined risk and the multiple ways to win around a defined event that has anything but a certain outcome with the break-even on the trade not far from current levels.

On Tuesday I got a little antsy and started to look to extended stocks that I think have gone too far too fast and INTC fit right into that category.   With the stock at $24.37 I bought the DEC 23/22 Put Spread for .19  (read here).  What I like about this trade is that if the stock were to pull back about 8%, I can make 4x my money and with defined risk of less than 1% of the underlying.  As I am anything but certain that we will go lower in the coming weeks, I want to make few low premium short bets on extended names that have massively out-performed their peers.

On Tuesday with the market rallying I did a little trade management on JEF Dec 10/5 1×2 Put Spread that I bought the previous Friday for .45 (read here)   With the stock about 6% lower ($11.50) in 3 trading days since putting this trade on, the Dec 5 puts that I sold at .20 each (against the Dec 10 puts that I am long) could be covered for .09 or an .11 profit, which I did and started to run the long puts outright.  In the next panic in the name I will look to re-establish this ratio spread.  This position could be the gift that keep son giving if I can continue to scalp the 5 puts with no tail risk.

Wednesday saw me jump back into the earnings game with a short on GMCR when the stock was $67.50. I Bought Nov11 weekly 60/55 Put Spread for 1.25 (read here).  Even with the stock down to what appeared to be depressed levels prior to their earnings print I couldn’t help myself and look to a defined risk out of the money put spread to play what I felt a situation that had great potential to be NFLXesque.  This trade worked out very well and took off the next morning for almost the full value of the spread.  I first got to looking at the name to suggest a defensive collar structure against a long when the stock was about $68.00.   Nervous longs could have bought the  NOV11th Weekly 62.50 / 75 Collar for only ~.50…..that structure protected a long below 62.00 on the day of earnings to Friday’s close (the stock closed the week at 43.71 and off of a low of about $40 on Thursday).  This collar should have been very instructive for some of you who hold stocks and go back and forth wether or not to sell before events when you think there is the potential for too much volatility to stomach, but you don’t want to miss out on some potential upside.

Last Friday I wanted to make a bullish bet into CSCO‘s earnings report as I felt the company is making some progress on their restructuring and If they were able to put 2 consecutive qtrs where they beat wall street expectations that the stock would act favorably.  With the stock at $18.00, 4 trading days prior to earnings, I bought the Nov 19/20 Call Spread for .20 (read here).  The stock closed the week, after beating and raising estimates up about 1.00 to 19.02 and I still have a week left to Nov expiration to realize the full potential of the spread.  I took some of the position off for a small gain, as the stock is really a market call at this point, if the market goes up this week it should continue to rally, but I left my crystal ball at home on Thursday!

Now most readers know me to be a bit of a contrarian and only rarely this year have you seen me express that view on the long side.   I think there could be just the opportunity to do so in RIMM.   With the stock at $18.20 I Bought DEC 20/22.5/25 Call Fly for .30  (read here).  By no means is this a high conviction trade idea, but the sentiment is just so bad so coupled with the relative cheapness of the structure detailed above I thought it was worth taking a shot for an almost 7.5 to 1 payout.

Well, I couldn’t have ended a week of “fruitful” trading without  talking or trading AAPL.   The stock was in the news a bit, or at least the rumor mill as there was a bit of speculation about iPad and iPhone production cuts….as I said a couple times out loud, good luck trying to trade AAPL off of rumor and innuendo from their supply chain reported by 2nd rate brokerage firms.  That said, the stock closed down on the week almost 4% vs the SPX which was up about 1%.  Something is going on there, I speculate more likely a source of funds for hedge funds facing redemptions than anything all that evil.  But as readers know I am not only long term a bit negative about their prospects relative to their last 10 years, but I bought a NOV 390/380/370 Put Butterfly for 1.10 When the stock was here).  I have this trade right where I want it with the stock closing the week at about $384.50 with a week to expiration…I am gonna sit and wait this out a bit.

Additionally in AAPL I laid out a Put Spread Collar for nervous longs (read here) that offers near at the money protection down to 350 until Dec expiration which also allows you to participate to the upside to about $400.  This sort of structure is specifically for longs who don’t exactly want to sell for tax reasons into year end, but are worried by the near term price action and want to protect gains.

I had a fairly profitable week trading while not even being that active, I initiated a few new positions and effectively managed some legacy ones……I am not going to over trade at the moment as I have little conviction as it relates to the macro, I want to focus most of my attention on individual stories where I think the markets are under-appreciating the potential outcomes.   Remember capital preservation is the key in times like these and I will get much more aggressive when the trend becomes a bit more evident.