Trading Diary – Dec 5th – 9th

by Dan December 11, 2011 8:59 pm • Commentary

Although last week had a highly anticipated calendar of potential market moving events, the broad markets didn’t do a whole heck of a lot, with the SPX only closing up ~85 bps and trading in only a 2.75% peak to trough range.  U.S. economic data continues to point to “less bad” readings, while there were some earnings disappointments by Dupont (DD) and TXN.  As it relates to the only thing most market participants care about; Europe, in a week where many expected answers to how the EU will make progress in a their efforts to solve their debt crisis, I feel in some ways, we were once again left with more questions, and thus more potential for future volatility.

For my own trading I have been paring things back a bit heading into year end and reducing position sizes as my conviction level is not screaming at me to “GET IN THERE”.   We had a little downward volatility Thursday with the VIX shooting back above 30 (even if just momentarily) only to get crushed in Friday’s rally.  If we can get through this coming Friday’s expiration without any real damage, the fix may be in for a year end rally, not that I care one way or another, it just seems that there are plenty that have a vested interest in putting some lipstick on a pig……….The SPX and the Nasdaq are practically unchanged on the year and some 11th hour shenanigans by mutual funds/large hedge funds could push things up a few %, maybe even 5 and before you know it we have kept a multi-year equity rally intact, avoiding the first down year since 2008.

Here is a quick recap of the my options trades detailed on the site:

MONDAY:  With few non-Euro inspired catalysts left on the calendar, I was left to look at things as trivial as TXN’s mid quarter update later that week.  While considering the guidance the company gave back in mid-Oct and the price action of the components of the SOX, there appears to be a little “have” and “have not” syndrome in the sector.  The SOX as a whole acts horribly year to date, while stocks like INTC that make up almost 10% of its weight have massively outperformed.  I made a near-term bearish bet that sentiment was too high for TXN heading into their mid qtr update and I chose to use a low premium short dated Put Fly to do so…..I paid .36 for the Dec17th 30/28/26 Put Fly.

Additionally, I have made some low premium short term bearish plays in INTC as it has approached and broken through the 25.00 level in the last couple months.  I went back to the well as my thinking was if I am right about TXN, this negative sentiment might work its way back to INTC.  I bought a low premium out of the money Put Spread in Jan that offers a potential 4.25 to 1 pay out by Jan Expiration.

TUESDAY: As things were a little quiet, I chose to do a little holiday shopping (on the web of course), it got me thinking about what I believe will be an ongoing raging debate in the nascent tablet space….the AMZN Kindle Fire at $200 vs the low end 16gb AAPL iPad for $500.  Tuesday (read more here) I literally bought 5 Kindle Fires for the price of 2 16gb iPads.  After playing with the Fire for a few days, and never using my iPad that I bought on it’s initial release in April 2010, I have to say that this is one battle that AAPL is not gonna just walk away with at it’s current price points.  There is no trade here, but it clearly reinforces my belief that the next couple years with out Steve Jobs maybe it’s most challenging on the product front in a very long time…..Jobs’ salesmanship got us to overpay for things we didn’t really need, new CEO Tim Cook will not have those special powers and he will not be given too many “muligans” on any product miss-fires.  This qtrs release of the fire is likely to be great PR for AMZN but not great for its already razor thin margins as many believe they lose money on the product.

Also I pulled the plug early on my AMGN Dec/Jan 60 Call Spread for a small loss heading into the close of the Dutch Tender.  This was a mistake as the tender went better than expected and the stock ran after the deal…..I guess the only thing good that came out of this trade for me was contributor Andrew Rosen’s very solid analysis of how to trade these events (which I obviously didn’t follow well enough).  Read Andrew’s break-down of Tenders here  in case you missed it.

WEDNESDAY:  With the market feeling a bit heavy as we were heading into the “main-event” of the week, Thursday’s ECB meeting and Friday’s EU Summit, I wanted to put on a short term bearish play on Deustche Bank (DB) as I felt that is where you would get your most bang for your buck in any Euro inspired sell off.  I bought a short dated out of the money put fly in an effort to have a low premium outlay but very high payout potential with a move of 7-13% up to Dec expiration.

THURSDAY:  With the market opening down more than 1% on disappointing statements out of the ECB regarding bond buying, our banks opened down just a tad and I moved quickly to buy a Dec Put Spread in MS, similarly to DB the day before, I wanted to choose the one (here in U.S.) where you would get the most bang for your buck.  Right after the open with the stock practically unchanged, I bought a very tight, low premium Dec Put Spread, looking for a quick move lower that would ensure making a multiple of my premium outlay.

Once it looked as if the market was not going to recover I look to do the same thing in Citi and bought a Dec Put Spread that offered an almost 4.5 to 1 payout if the stock sold off 12% by Dec Expiration.

Now I know that sounds a little aggressive playing for those sorts of moves in such a short period of time, but the stocks are obviously moving around a bit, and MS and DB closed down almost 8% each on Thursday.

FRIDAY:  For no real apparent reason Friday got off to a very good start without a whole heck of lot of news out of the EU summit and kept right on going the closing bell.  Bank stocks reversed much of  Thursdays damage to put in place solid gain for the sector for the week, but some showed signs of fatigue into Friday’s close in a counter-trend sort of move.

I make the following mention because I think it is important to understanding how we like to do things here at Risk Reversal, but my best performing position Friday morning in a solidly up market, was my bearish bet in TXN from Monday.  The stock opened down almost 5% on the tightening of their 4th qtr range that was below the street’s expectations.  After reviewing the press release and some analyst comments it became apparent to me that this was not a disaster by any means and the stock was likely to rally in a strong market.  I moved my feet quickly and closed out the position in 2 trades over the course of the 1st hour of trading and locked in a double for the position.  The opening print was basically the low of the day and the closing tick was basically the high, closing up .02.

What’s important here is that you can always look to make money on counter-trend ideas either within the sector, or from a broad market perspective.  And the other important point that we constantly preach about is getting in motion on event trades…….just because this was a multi-leg position should not scare you from trading out of it. I had the inclination that the stock would rally and I traded. That’s the point. I would much rather make a decision and move on it and be wrong than make a decision and not move my feet and have it go wrong.

Also late Friday afternoon, I previewed my trade for Options Action.  I took a look at BBY heading into Tuesday morning’s Q3 earnings announcement.  Even with the stock up a bunch in the last 2 months, the stock is still down about 18% on the year.  The options market is implying about a 7.5% move vs the 4 qtr avg move of about that.   Sentiment is very poor heading into the print and with short interest high at about 11% of the float, I want to make a defined risk short term bullish play.  I laid out 2 Dec call spreads that should perform well if I get the direction and the magnitude of the move correct this week.  As I stated in Friday’s post, I have not put either trade on yet and will look to evaluate the story again tomorrow prior to Tuesday’s print.