Trading Diary Jan 17th – 20th

by Dan January 23, 2012 7:24 am • Commentary

Friday saw the SPX make it’s highest close since July 27th, while the VIX had it’s first close below 20 since July 25th.  In that time period the SPX had an approximate 18% peak to trough drawdown, while the VIX more than doubled and spent most of the next 4 months above 30!

With the SPX now at 1315, up 22% from the intra-day low on Oct 4th, many market participants are eyeing a quick run to the 52 week high made on May 4th at ~1370, which is only about 4% from current levels.  To do this in the next couple of weeks we will need the trend in U.S. corporate earnings to continue to be “not as bad as feared” and some incrementally positive news out of Europe, which for the moment seems like it is in the cards.

Last week’s Holiday shortened week may have been fairly instructive to those playing for a matched high in the near future with Tuesday’s close (which was above the previous Friday’s Close) the low for the week, and Friday’s (Jan 20th)  close (despite a surprise earnings miss from GOOG) the high for the period.  This is obviously fairly bullish action, and at this point we are breaking the barriers of what most would have attributed to the “January effect” for stocks.


5 day SPX chart from Bloomberg LP


Also confirming this bullishness, as mentioned above, the VIX closed below 20 for the first time since late July, capping a period where the SPX 20 day realized vol has been slightly above 10 and the 10 day about 7.5.  This is merely telling us that the market is barely moving around and doing so in a very orderly fashion that is generally pointed up.  To put this in context, the 60 day and 90 day realized vol in the SPX had been 23.8 and 25.7 respectively, which was implying more than a 2% intra-day move during that period vs the implied move now of about 50bps.

If the markets during the summer into late Nov were filled with fear, the opposite can be said for the current environment.  In some ways, if you weren’t set up for this rally in the first few days of the year, trying to capture the next few % could be the most dangerous.  I am of the mindset that the likelihood that Januarys gains are held onto for the next 11 months, without a Q1 sell off that takes most major indices down for the year, is highly unlikely.  I think there is a distinct possibility that anyone who wants to buy stocks as they think we are out of the woods” from last years ills, will likely have a better opportunity in the near future.

With all that said, lets get to last week’s trading…..As many know my positioning has been light from a trading perspective and I am trying to avoid risking large amounts of premium on event specific situations, especially where I lack strong conviction.  I think it is safe to say that I lack strong conviction as to when the sell off comes and given my pre-disposition to fade rallies, I kind of get it that we are going up for the time being….

Heading into Thursday’s DEC qtr reports out of INTC & MSFT, I remained long some Jan out of the money puts that I had bought in DEC and Jan (all expired worthless), and added a tight put spread in DELL, using Feb expiration.  The idea here was that I already had skin in the game with INTC and MSFT, that a logical derivative play would be weakness in DELL on any less than stellar commentary about PC sales….DELL is already up 14% ytd, but couldn’t really rally Friday with MSFT up 5.5% and INTC up almost 3%, so this is one I want to stick with for a bit.

On Wednesday, GS did the unthinkable and rallied after posting better than expected earnings, despite the fact the very numbers they beat had been dramatically lowered in the prior month or 2. The Friday before earnings (Jan 13th) I bought out of the money calls in Feb, in an effort to avoid playing just the earnings event, this was more a sentiment play, and the way I saw it if the company were able to beat and tell a relatively upbeat story the stock would likely go up for days, maybe even weeks and test the post Thanksgiving high of about $120. Following the strength after earnings, I sold the Feb 115 calls against the Feb 110s I own to make call spread, thus locking in some gains and dramatically reducing my risk going forward.

Also on Wednesday I closed a position in RIMM that quickly became a winner after rumors that Samsung was interested in buying the company.  What was most interesting about the price action on that the week was that even after Samsung’s denial of interest in RIMM, the stock quickly gave back much of its gains, only to recapture a bit and hold near the highs of the recent range.  Yesterday it was reported that the Co-Ceos will finally step down, and an internal candidate has been chose to run (i.e. sell the company).  The stock is already up 4.25% in the pre-market on this news, and we could finally hear the words “we are exploring strategic alternatives, that could include an outright sale of the company”.

Also on Wednesday I took a look at EBAY and laid out the expectations for the qtr and the likelihood of upside guidance.  This one kind of stumped me as street seemed in the same place, Q4 would be in-line to slightly better and that it would be hard for the company to raise guidance.  Well we got the Q4 beat and then a cut for Q1 and 2012 that was as bad as feared and the stock rallied.  This one did not set up as an obvious long into the print to me, so based on where I thought it could go (technically) with a guide down worse than I expected, I risked a small amount of premium on a Jan Put Fly that was rendered worthless by the stocks bounce post earnings.  These sorts of trades, I will do from time to time, even if I don’t have strong conviction, as I am defining my risk, and risking what I am willing to lose.  I have a hard time doing work on a name, and then not participating around an event, so usually I will find the structure that I think offers the best risk reward, with smallest premium commitment and put a little skin in the game.

Thursday was big tech day with IBM, INTC and MSFT all reporting their Dec quarters and all posting better than expected results.  INTC and MSFT had been trading near 52 week highs, but IBM was the most curious one to me as it was down on the year heading into the print in stark contrast to many of its large cap tech brethren.  After looking at IBM’s expectations the only thing that encouraged me to lean short was ORCL‘s guidance and commentary in DEC and IBM’s chart that appeared to be making a text book head and shoulders top.  Well with everyone beared up in the name it didn’t take much to get the stock going after better than expected results.  I originally didn’t have a trade on the name and didn’t want to play the quarter so I looked to Feb to play for a technical breakdown with a put fly with a potential 5 to 1 payout if the stock were to settle back at support around $170.   Well I kind of out smarted myself, the last thing I wrote on my preview post before putting on the put fly was, “THAT SAID GIVEN THE STOCK’S RECENT UNDER-PERFORMANCE, A BEAT FOR Q4 AND SOME POSITIVE COMMENTARY COULD SPARK A FAIRLY SHARP RALLY IN THE SHARES.”   And that is exactly what we got, My Fly lost a good bit of its value, but and move back towards $180 in the next month could help salvage some premium.

Also on Thursday, I took a look at GOOG and decided not to play as it was clearly not a name that I would buy into the print, as I said in my post of that day; “I am a bit of a contrarian, and I don’t buy stock that everyone loves and almost everyone I know owns trading a few % off of its 4 year highs, and especially into an event like earnings where the stock has been very volatile”.  IN this instance, unlike EBAY, I offered a way where longs could protect themselves a bit, as I felt there was a bit of complacency baked in to the shares at current levels.  I feel strongly that those who always lean long should consider collars simular to the one I laid out in GOOG on Thursday, they may seem complicated with all the legs, but if you owned GOOG and owned this structure Friday morning you would mitigated a bit of the risk of staying long into the event.

Lastly, Friday based on GOOG’s outperformance of its implied move following disappointing results, I took a look at expectations for AAPL heading into its print Tuesday night and laid out a similar defensive structure to that of GOOG for AAPL holders.  While sentiment couldn’t be better with the stock making a new all time closing high on Wednesday, the risks seem fairly similar to GOOG last week.  Everyone and the mother owns AAPL, and My fear is that if there was a second consecutive miss to consensus estimates in a row (and that’s a big IF as weak iPhone and iPad units last qtr have kind of been explained away), the stock would likely be down 7-10%.  MY view is that juxtaposed to the potential upside I am not exactly sure the risk rewards lines up brilliantly, meaning the stock just a couple % from all time highs discounts a lot of good news near-term, regardless how cheap and how much cash they have……I think given GOOG’s reaction to their disappointment, AAPL holders should take slight pause as they head into new CEO Tim Cook’s first real solo conference call.

So after all of that I mostly had a bad week trading, in a couple situations where I knew better I got involved in a couple situations where I basically just pissed money away because I was bored.  Earnings season is tricky, for some of us traders their is this overwhelming desire to get involved and put some chips on the table, especially after you have done some work on the name/event.  I for one am not immune to these urges but will try to do a better job to resist this week.