Trading Diary Nov 28th – Dec 2nd

by Dan December 4, 2011 8:48 pm • Commentary

Last week equity and debt markets together did a bit of damage to the bear case for the “Eurogeddon” doomsday scenario. The week started off with a healthy 2% rally Monday ignited by an unconfirmed (and quickly discredited) rumor that the IMF was readying a loan for Italy.  I guess from such an oversold condition this was the exact sort of thing that could (and did) squeeze shorts.  Equity markets held their gains and sovereign yields in Europe came in from near record levels.  On Wednesday, though, the world markets got a jolt from the news that 6 central banks (led by the U.S. Fed) lowered the dollar swap rate in a coordinated fashion in an effort to offer cheaper access to dollars to help ease funding concerns among European banks.  By the end of the five day trading session, the SPX was up a little more than 7% and markets like the DAX in Germany closed up about 12%, while the yield on the Italian 10yr which had been hovering above 7% is now at a still high 6.68% (had been less than 5% in mid-July).

If Thanksgiving week’s price action signaled gloom, this past week could not have issued a more dissimilar statement, especially as we head into this coming week’s ECB rate decision (Thur) and the much anticipated EU Summit of the 27 European leaders on Friday.  Many market participants have priced in a 25bps cut from the ECB, but the real market mover will be answers to such questions as; ECB serving as “lender of last resort” with greater latitude to “monetize” Eurozone Sovereign debt, and any info on EFSF-size and its ability to lever.  Given the last few months results out of such meetings I would say that it is unlikely that expectations are too high at this point for any meaningful answers to these questions, but at this point of the year my guess is that central bankers and political leaders are just trying to buy some time and try to see if they can get equity markets back towards “reasonable” declines for the year (meaning single digit losses like the U.S.) and have sovereign debt yields back in to pre-July levels.

As for my own trading I had a fairly quiet week, I spend much of the Thanksgiving week reducing and closing shorts, but while I was not net short heading into last weeks monster rally I was certainly not long and did not catch much if anything of the rally. Here is a quick diary of the trades detailed last week on

MONDAY: I might have been a little early on this one, but with the European equity markets ripping higher 2-3% across the board on a BS rumor of IMF aid to Italy, the Euro was up a little more than 1% on the day.  I wanted to look out to Jan expiration to find a Put Spread in the FXE  that would benefit from a breach of the 1.30 support level in the Euro vs the U.S. dollar.  In a week that saw a minimum of 10% rallies for most Euro equity markets, the Euro’s less than 1% rally (for the week) was a bit disappointing to say the least.  This price action re-enforced my bearish view, but as I have stated on many occasions, I have not edge on the macro stuff, and I will closely watch this position with an eye for cutting it as we head into the late week EU festivities.

TUESDAY: After the previous day’s rally we got a little bit of a consolidation day and I frankly didn’t see much to do……for those that missed this video (sent from subscriber Matt J.), this basically summed up what I felt my trading opportunities were Tues afternoon.

WEDNESDAY: On a day that saw world equity markets have their biggest up day in months, I was obviously itching to short something.  After taking a look at expectations for LULU‘s Q3 earnings, I wanted to press a strategy that had worked well for me in October/November in names such as AMZN, NFLX, GMCR & CRM; shorting high valuation, cult stocks into earnings.  With the stock at $49.50 I bought the Dec 47.50/42.50 Put Spread for 1.40

THURSDAY:  LULU reported and did not have the beat and raise quarter that bulls were hoping for and the stock opened down 18% below the put strike that I was short.  This was kind of a tricky one, with the stock having such an extreme move, and below both of my strikes, volatility remained high, so to get anywhere close to the max width of the spread I would need 2 things to happen, the stock to settle in somewhere near the low end of the spread, and some time to elapse.  Unfortunately with such high short interest in the stock, it didn’t stay down there long.  As in any event trade, with such an extreme move I will look to take some near immediate profits and living by another rule in my options trading routine, if I I have a double or more in a very short period of time, I will take profits on half.  In this instance, shortly after the open with the stock at 42.80 (just above my short strike) I sold half of the spread at 3.30 (paid 1.40 previous day).  I do this because no matter what happens from that moment on I can’t lose.  In this instance this turned out to be the right move as the stock spent the rest of the day rallying from those extreme lows to close on the high of the day.  I would close the second half of the position less than 3 hours later for a whole dollar less than the first half as the stock continued to rally, but ending up with a double on the trade.  This was a trade that could have easily gone the other way as evidenced by the fact that the stock went from 49.70 on Wednesday’s close down to 41.70 on Thursday’s open to close the week at 49.70.   My view remains the same in names like LULU, they can’t possibly maintain these valuations, but you’d have to be nuts to short these stocks outright on just valuation.  I will continue to play events in these cult names through long premium options spreads.

With Thursday’s consolidation following the massive first 3 days of the week I decided to clean up some positions and start to reduce some recent long spreads that I put on in GS and MS the prior week.  This ended up being a bit early, but I was in the mode of taking profits.  Thursday morning, I sold the GS Dec 100/105 call spread, GS Dec2nd Weekly 100 calls and the MS Dec 15/16 call spread.  At that point I thought the stocks had just gone too far too fast and was happy with the short term gains in the 2 call spreads and took a small loss on the weekly GS calls.

I also closed a calendar call spread I had on in GRPN that just a few dollars was going fairly badly, but with the stocks massive rally after its massive decline, I was able to close out for a small gain, and take a step back and re-evaulate the proper way to expressive a long-term bearish thesis on the name

FRIDAY: RIMM was down 10% on an earnings pre-announcement, and while this was not unexpected, there is a general indifference finally settling into the most existing investors.  The Dec 20/22.5 call spread that I own, (not for an actual reversal of business fortunes, but for the hope that the company comes to its senses and finally makes the decison to seek a buyer or a partner), lost 2/3rds of its value and faces an uphill battle towards break-even with 2 weeks to expiration.  On Options Action Friday evening I laid out a longer dated call spread in Feb that could look attractive as opposed to buying the stock in front of any activist or corporate action.

Also on Options Action I laid out a way to fade the recent bank move in DB.  I previewed this trade on the site Friday afternoon but was very quick to point out in my post and on the show that this was not a trade that I had on or would put on first thing Monday…I highlighted DB because it had the biggest move in the space and thought there was a distinct possibility if the stock continues to rally into the ECB meeitng Thursday and the EU summit on Friday the stock could set up as a decent short into the new year, barring some unilateral agreement on the European Debt situation.


As we head closer to Dec expiration and thus closer to year end I am seeing fewer and fewer trading opportunities and I am not sure it makes a whole heck of a lot of sense to fight what could be a continued year end mark by those looking to put a little lipstick on a pig (the pig being this very volatile year in the equity and debt markets).  My trading positions are probably at the lowest exposures of the year and I will look to use capital sparingly as we get to the back half of the month, as liquidity may start to dry up in single stock names.