Trading Diary: Nov 14th – Nov 18th

by Dan November 20, 2011 9:53 pm • Commentary

Last week our equity markets had a bit of a slow bleed without a single up day for the SPX.  The Index closed the week down about 3.8%, leaving it down about 3.3% for the year.  At this point, the cause of the weakness seems a bit boring but uncertainty and the inability of European leaders/bankers to get “in front” of their debt problems is largely the culprit, as our economic data here in the U.S. continues to be “less bad”.  Earnings were a bit of a mixed bag though, as most retailers came in inline to slightly better (LOW, HD and WMT), while outliers continued to get pounded (ANF down about 16.5% on the week following their miss and CRM down about 10%).

Financial stocks, banks in particular, continue to just act dreadful and appear poised to re-test the early Oct lows.  GS, C and JEF all closed down almost 10% on the week, while MS got clobbered down 13%.  These stocks act sick and with-out any near term resolution to recapitalize European Banks and to support European Sovereign debt, these stocks may close on their lows for the year…..wait to bottom-fish until late December.

I guess one of the more striking things that stood out to me last week was the weakness from some of the Nasdaq’s most prominent prior leaders; AMZN & AAPL (both at one point in Oct were up more than 30% on the year).  AMZN gave back half of its gains for the year just this week, closing on its dead lows of the 5 day period down about 9%.  If AMZN heads back to it’s next support level of around $180 it will be unchanged on the year.

AAPL on the other hand has seen its stock sell off about 7.5% this month.  This price action in names like these is troubling for numerous reasons, but largely I think this shows a lack of confidence that some large investors are placing in the overall market.  If they are selling names like these that have worked so well this year it appears that they are throwing in the towel and locking in some gains due to fears of uncertain and volatile markets to come.  I have long said that AAPL will be the last battle fought in the equity markets among large institutions (meaning they will give up on most everything else and they will need AAPL pulled out of their cold dead hands before they sell willfully), but could the price action since Jobs death and their disappointing earnings last month be the start of the battle?

As for my own trading I remain geared towards the short-side of things and see little to changed that view (I know that is also getting boring to most of you, I promise someday I will be bullish). I have been in the mindset that there are plenty of factors that could cause a year end rally, but the later we get into the year with little progress being made in Europe and what appears to be the failure of the congressional super-committee to make any progress on our own fiscal issues the likelihood begins to fade with every passing day.

Last week I had a fairly good trading record with most gains coming from shorting the first rally of the day and covering at east half when we retouched the prior lows.  On the single stock front I was fairly active with a couple small losers but at least one big winner that more than made of for those.  I continue to ride some bank shorts that are the gifts that keep giving….Here are some of the high and low lights:

Monday saw options listed in GRPN and the stock in my opinion will be one of those bad dot-coms from the late nineties that saw their stock go to low single digits by 2001…….the put options are expensive due to the borrow situation, but I wanted to look to lessen the cost of Jan puts so I bought the Dec / Jan 20 Put Spread for ~1.20 .  This position was down small on the week with the stock rallying a bit.

With AAPL quickly approaching the short strike of my Nov put fly, I wanted to look to take profits and eventually use the proceeds to roll out to Dec.  On Monday and Tuesday I sold the AAPL Nov 390/380/370 Put Butterfly that I bought for 1.10  at an average of about 2.42

INTC continues to baffle me as one of the few tech stocks that I can find pushing up or making new 52 week, or multi-year highs for that matter.  I got a little stubborn and Bought the Dec 24/22 Put Spread for .35 in addition to the DEC 23/22 Put Spread that I bought the prior week that was quickly losing value.  So basically I am being a bit undisciplined and averaging down and getting a little shorter than I wanted to be initially.

On Tuesday I also took a punt on ADSK heading into their earnings print on the short-side. This is not a story I know well but I was keying off of a rating downgrade from a sell-side analyst that I generally think is pretty good.  Qtr was better than expected and the stock initially rallied somewhere near the implied move rendering my put spread nearly worthless.  But with the market selling off on Thursday I had shot of getting out for about half the premium I paid for the Nov 33/31 Put Spread bought  for .42 .  I elected to let it ride as I thought there was a chance that if the market collapsed Friday that I maybe able to actually make money on the thing…….close but no cigar.

On Wednesday as AAPL had bounced about 5.00 from the point that I closed my Nov Put Fly I decided to use the gains from the prior trade and roll out to DEC and for a wider fly (nov was $10 wide). I bought the DEC 375/360/345 Put Butterfly for 1.70  The timing of the roll worked out well as I took Nov off near the lows and put Dec on when the stock bounced.  Now I have a position that I really like as I am isolating a technical level that the stock could easily head towards over the coming weeks if the stocks under-performance persists.

Also on Wednesday I closed the balance of a CSCO Nov 19/20 Call Spread that I bought 2 weeks earlier for .20 .  I bought this into earnings the prior week and sold half after the print for break-even and then the balance Wednes at .20 as it appeared the stock would have a hard time getting through 19.00.  This is a stock that I think can be bought on weakness possibly back to about 17.50 on any major market disruption.

As mentioned above, ANF missed earnings and gave crappy guidance 2 weeks after missing same store sales estimates. Holders are hate selling the stock which has lost about 38% of its value this month along.  I think this is a cheap stock and has the potential for January rebound as fund mangers pound the thing in an effort to get it off their sheets this year. I Bought the Jan 55/60 Call Spread for 1.00 playing for an early 2012 bounce back to resistance.  This was a small loser on the week as the stock closed at the lows.

Thursday I went back to the well in GMCR as my short into earnings last week left me with a thirst to short every rally in this story that smells like crap.  The stock had a massive 1 week bounce after the post earnings massacre filling in a good portion of the gap lower.  When the stock was $52.60 I Bought Dec 50/46 Put Spread for 1.55  

The following trade made up for any losers and any little trading mistakes that I had on the week.  I felt that sentiment was to positive heading into CRM Q3 print and I Bought the Nov 120/110/100 Put Fly for 1.25  This trade was probably as much of a home run as you will see on this site as the stock closed a few % away from the guts of the fly and I made nearly 4.5x my money in 1 day.  Flys can be difficult and expensive to manage, but I really like them for events, especially when vertical spreads look pretty expensive.  In a lot of instances that I use Flys I would normally use a 1×2 vertical spread, but too be honest I don’t think selling naked options is appropriate for most retail or self directed investors, especially in this market environment where institutional investors are shooting first and asking questions later.

I also felt the need to tinker with my position in JEF with the stock trading so poorly and breaking through the downside put strike that I am long in DEC.  My original position was long the Dec 10/5 1×2 Put Spread for .45  when the stock was 12.30, now with the stock at 10.00, after already covering the Dec 5 puts for a .18 profit 2 weeks ago, I sold 1 of the Dec 5 Puts Thursday at .30 (now have Dec 10/5 ps 1 up), and will look to turn back into a 1×2 spread with little to no risk beyond the premium that I have committed to the trade.  Keep an eye on how I continue to manage this one, as the stock moves around into Dec expy there will be more opportunities to trade the 5 strike put.

My worst trade of the week was taking a page out of the .com playbook of trying to play AMZN for a counter trend bounce into Black Friday with weekly call spreads.  On thursday with the stock sitting right on support I Bought NOV25th weekly 210/220 Call Spread for 2.00 .  Well the stock did break through support and the spread has lost more than 60% of its value in a day…..the fact that they were weeklies and heading into a weekend didn’t help the poor price action.

Friday for Options Action I wanted to take a look at HPQ and what I think is setting up to be high near term expectations for HPQ’s earnings “Call” tomorrow night (notice how I didn’t say the earnings themselves). With the stock around 28.00 I Bought the Nov25th weekly 27/25 Put Spread for .45  My bet is that new CEO Whitman will in fact lower guidance more than the street expects and giving a frank picture of the challenging environment.  With the stock up 25% since Whitman took over, I think there is a bit too much enthusiasm in the name at current levels and would expect a little pullback of 5-10%.

And last but kind of least, our loser friend RIMM….I have thought on this one a bit and decided that if my guess is correct and these guys finally smarten up and realize how dire a situation they are in and finally decide to hire bankers to “explore strategic alternatives” then the stock could head to the mid 20s given its ever decreasing valuation/market share and relevance.  My original position long Dec20/22.5/25 call fly seemed to be a bit difficult to nail and I decided to mess around a bit and turn into the DEC 20/22.5 call spread for ~.63. I like the risk reward here as I think if management doesn’t do or say something significant on this call the stock could go to the low teens and quickly enter a little bit of a death spiral, but if they are finally proactive, then the stock could be 23-25 and I am risking .63 to make 1.87.

Ok that was a mouthful,  but in all I had a few small losers, a couple small winners, some consistent day trading in index etfs and one big winner.  So the moral of the story in my opinion, even in a volatile market is stick to what you know and what has been working.  Fading high valuation names with high expectations into events has been working and I will continue to do when it makes sense.  I also am doing my best to avoid trading the macro picture because generally I don’t have a clue what, how and when European leaders/central bankers will do to contain their debt crisis and this is clearly driving the bus.  So I continue to lean on poor price action but am most of the time defining my risk and looking for good risk reward relationships in most trades.  As for this week strap on your helmets cause with our super-committee FAIL we could see some whacky moves in a low volume Holiday shortened week.