Trading Diary: Nov 21st – 25th

by Dan November 27, 2011 10:16 pm • Commentary

Last week the SPX had a rough three and half days of trading where Monday’s opening tick was practically the high and Friday’s shortened 1pm close was the the dead low.  World debt and equity markets trade much like they did in 2008 post Bear Sterns, but pre-Lehman Brothers.  The uncertainty and general dissatisfaction with the lack of cooperation to the European approach to containing their debt problems poses massive risks to a stable close for our markets this year to state the obvious with about a month left to go.  The sell off of the last couple weeks seemed to be all too orderly with little panic. While some previous market leaders like AMZN and AAPL are breaking down and giving back much of their gains for the year, suddenly, we have a market that lacks leadership.   There continues to be severe cross currents ranging between our economic data that seems “ok”,  while U.S. corporate earnings have probably been a bit better than most would have expected at this stage of the game……..all of this against the backdrop of a situation in Europe that has the potential to grind economic activity to a halt and cause a double dip.

As I write at 10:15 pm the S&P futures are up about 2% on media reports that the IMF is putting together a 600 billion Euro aid package for Italy.  If true this would obviously be the first piece of positive news towards containing the impending debt contagion that the region has gotten in weeks and coming off of such an extreme short term oversold condition could clearly do some damage to shorts early this week.  But if the rumors are not true, and/or the rally can’t stick for more than a day, then watch out below.

This overnight move, and the potential for a a few day rally was the exact reason why I was becoming less comfortable staying short as the SPX neared support at ~1150.  This was also the same reason why over the course of the few days prior to the Holiday, I covered or reduced short exposures and actually added some longs.  Below find a little diary of last weeks trading:


HANS: Monday morning I broke a rule that I normally live by and pressed a down opening.  Now normally when I say not to do this I generally mean by pressing index’s or etfs on down openings of 1% or more, as most of the time there will be one rally off of the opening gap and offer a better entry point. In this instance I did not do so on a macro basis but I was fairly convinced that the market would see lower lows over the course of the week and wanted to go back to an old favorite; HANS on the short-side.  As I stated in my post (here) I had no fundamental reason or catalyst to look ahead to, I merely thought this stock is in a class (GMCR, NFLX, DECK, CMG, AMZN, LULU) of overvalued stocks where some have broken, and I expect the rest to follow suit if we re-test the Oct lows.  Since buying a Dec Put Spread on Monday, the stock did in fact sell off close to 4.5% and the Spread is up about 35%.  With the stock closing Friday at the Put Strike that I am long I feel I have this one right where I want it. If the spread is worth double what I paid I will stick to the playbook and sell half and let the other half ride, but lets not get ahead of ourselves just yet.

GMCR: Keeping with the “overvalued piece of crap” theme I bought some Nov weekly 50 Puts in GMCR (read here) on Monday as I thought the ~35% rally off of the Nov 11th lows following earnings was a bit overdone and wanted to make a short term play that if the market continued to be week in the coming days that those who bought the stock well on the puke may look to take some profits.  Well the stock reversed and a day later I sold the puts that I bought for 1.20 on Monday at Tuesday at 2.20 (read here).  With weekly options, and especially with a very shortened week there is no upside to wait around as those options would decay quickly without any movement, so I got movement and took the money and ran!

WMB: In collaboration my my colleague Andrew Rosen I bought a $4 wide Dec put spread in an effort to fade the impending E&P spinoff and largely because the stock seems overbought and the outcome of the event for the stock seems unclear in the near-term

INTC: With the down opening Monday I also used the weakness to take some profits on some shorts, as opposed to adding some (above)…..INTC had been a stock that in my opinion was getting a little ahead of its fundamentals…..the stock has just broken out to a new multi-year high at 25, but I kind of dug in and added a second Dec put spread, Dec 24/22 to the existing Dec 23/22 put spread (both here) that I initiated earlier int he month.  This past week I took both off as the stock had come on about 10% from the high made earlier in the month and I took both spreads off for a little more than double what I paid, all of this after being down in both.

HPQ: on the previous Friday I had initiated a Nov25th weekly 27/25 Put Spread in HPQ in front of their new CEO Meg WHitman’s first earnings call on 11/21/11.  With the market down prior to earnings Monday afternoon,  I took some profits right before the close as I felt that I put the Spread on for an event but got Monday’s market move for free so to speak.  I left half of the postion on heading into the event, but booked a .22 gain on half of a postion that I paid .45 for the day before (read here).  This is a lot of ways gave me more confidence as it lowered my break-even around an event on a weekly option.


HPQ: Tuesday morning after the company reported slightly better than expected the previous evening, with guidance not as bad as some feared the stock was down 5% shortly after the opening and I was able to sell the balance of the position at at 1.20 for a .75 profit (read here).  This was fairly decent trade management in my opinion even though I didn’t make the full profit on the full position.  Again, I am a singles and doubles hitter and I book profits when I can get them.


BAC & MS: With the market down for the third morning in a row, and bank stocks quickly approaching their lows from early October, I wanted to be a little bit more defensive with a couple of put spreads that I have had on for some time in the space.  In both names I was originally long ratio put spreads (BAC Jan 5/2.5 1×2 and MS Jan 10/5 1×2)….I had traded the ratio on the short strike well for profits, and with the spreads just one up I wanted to roll the short strike up to lock in some gains as I thought the stocks were getting pretty oversold and possibly prone to a rally (read here).  While I am fairly convicted that these stocks will make lower lows in the coming months, I am trying to remain cognizant of the fact that just as stocks overshoot on the upside they can also do on the downside…..on an interim basis I felt they were getting a bit oversold and wanted to reduce my risk a tad.

JEF: not too dissimilar to the BAC and MS I felt that this one was getting a bit overdone and my sense was that the next piece of news was likely to be “less bad”.  I closed this short position for a nice gain (read here), as this was never a fundamental call, had more to do with sentiment and price action.

AAPL: with the stock down 4% in about 10 days, and quickly approaching support at its 200 day moving average, I wanted to make the point that those who used Dec Put Spread Collars to protect longs (read here) should consider covering the short upside call as the stock was getting a bit oversold near term and the Dec 400 call was getting just a tad dollar cheap to leave on short against a long.

Additionally, about a week earlier I decided to make a near term bearish bet in AAPL with a long Dec Put Butterfly which had performed ok in that time period.  Again with the stock down in a relatively quick fashion, and approaching support and the guts of the fly I took off 1/2 of the spread for a .70 gain (read here).  With Wednesday’s weak price action in both the market and the stock I thought there was a good chance that we would get a relief rally soon and wanted to take some money off of the table.

MS & GS: With the banks getting fairly oversold, and after earlier in the day adjusting a couple short biased trades in MS and BAC in Jan, I wanted to make a near term bullish bet in GS and MS that the stocks were a little overdone on the downside and play for a 10-15% rally in the coming weeks (read here).  By no means am I wed to these positions and in some ways I am heading my bets as I still have tight(er) Jan Put Spreads on as a result of the morning’s trade adjustments in BAC and MS.  These were not a high conviction trades, more of a sentiment trade and as many of you know I couldn’t be more bearish on the space, but sometimes you have to make some adjustments to your near term view to separate the forrest from the trees.


SO After a busy few days earlier in the week I had a bit of a turkey hangover and basically sat on my hands for the few hours of trading on FRIDAY.  I felt good that I reduced my exposure on the short side, and had waded in a bit further on some longs.  The name of the game here is not to be caught short even when you think things have a strong likelihood of going lower.  So as I have been suggesting in my morning note over the last couple days, I am no longer playing for a crash on the short-side, even-though I remain bearish, my main priority is to not get caught pressing the lows!