Last week saw a one of the smallest week on week price movements for the SPX in a long while. The index closed less than a point from the previous Friday’s close, and saw intra-week movement pick up after the FOMC meeting only to settle back in basically where it started. As I have said in this space for the last couple weeks, the rally appears to be getting narrower and narrower on low volume, and appears to me that there is a lot of good news priced into stock at current levels.
The one year chart of the SPX (below) is fairly interesting, since the opening day of the new year, the index has closed above its 200 day moving average, and has steadily marched higher without a single close of less than 1% from the previous day. The VIX confirms this complacency, since breaking below 20 last week and continuing to make lower lows and closing the week at 18.53, levels not seen this late July.
In the chart above, I highlighted the channel of 1300 to about 1360 which was a monster support resistance level for the first half of last year until the chart fell off a cliff in late July. The trend-line from the Oct intra-day lows is obviously still intact, and could very possibly hold and assist the SPX in any test of last years highs. I guess one of the many things that I would worry about if I was long the market, is that there appears to be declining conviction that the market can do this without first consolidating……..I base this observation on average trading volumes and fairly bullish sentiment readings, and I suspect that a quick 50% re-tracement of this year’s rally could be in the cards very soon.
What I found most telling about this week’s price action was that the equity markets seemingly liked the FOMC’s commitment to leave interest rates near zero for at least a year longer than their previous forecast, but the enthusiasm did not take long to wane after Wednesday’s late day rally and Thursday’s up opening that soon evaporated. This is just tired action, not exactly long term bearish, but clearly losing some steam. In a lot of ways I would find myself a bit more constructive on equity markets if we had one more scare possibly taking us back to unchanged on the year, this I think would set up as a very good opportunity to get long in what could be a decent year for stocks heading into Nov’s presidential election. The Obama people will do everything they can to help along the economy and portray progress on employment and housing fronts.
Ok, enough of my near-term bearish musings, lets get to last week’s trading….I started the week with the intent on not getting sucked in too many potentially binary earning’s events, especially those where I lack strong conviction. AAPL was kind of one of them, I have said on many occasions in the last few months, that AAPL’s next couple years as a company are likely to be far more challenging than their last few, but that was clearly not evident in their Dec quarter earnings. I am stubborn but not stupid, while I was fairly confident that the company would beat their own guidance and what ended up being fairly low street estimates, I was not willing to make a bullish bet in a stock that was trading within 2% of its all time highs. That being said, I was not willing to commit any real premium to a short bet as I thought the likelihood of a miss wasn’t great. I did layout a collar for long holders who have registered nice gains in the stock, but were worried about potential near-term downside volatility. This one will be educational as the stock is $2 higher the short strike that I used, and the position is essentially an overwrite was we head into Feb expiration.
The trader in me though wanted to have some skin in the game even if I felt there was a very small probability of making money on the short side after AAPL’s print. The trade that I came up with, risked very little capital and would have paid 25 to 1 if for the small chance AAPL saw a sell-off similar to GOOG‘s of the prior week. I isolated a level that I thought would be a huge support level in the event of a disappointment and bought a tight $5 wide Butter Fly. Now some would say that I just pissed away the .20 in premium, but in the off chance that the stock did crater this would probably been one of my most rewarding trades ever. You gotta be “in to win it” as they say.
On Tuesday, heading into YHOO‘s earnings I decided to fade the implied move (as it seemed rich to me) and try to set up for a rally in the shares looking out to Spring in an effort to give the new CEO to assess his options regarding a spin or sale of the company’s Asian assets. The stock barely moved on earnings and the Feb/Apr 17 Call Calendar that I bought is basically unchanged. At some point soon, I will look to cover the Feb 17 call that I am short and then spread the April 17 calls into a call spread.
Wednesday heading into NFLX‘s Q4earnings I came to the conclusion that while the implied move seemed high, the stock was likely to be down modestly or possibly hit the implied move to the upside….Similar to YHOO, I used a Call Calendar, the Jan/ Mar 115 Call Spread, but in this instance I sold the weekly options as they were ridiculously expensive and bought the March 115 calls. Not only did the stock rally but it basically went to the exact spot on Thursday’s open of the implied move, which was brillant for this spread, as the March calls would be far more valuable than the weekly’s which started to see most extrinsic value decay rapidly after the gap with less than 2 days to expiration. I took the money and ran as I made more than a double in one day, but will keep a close eye on this name as the short interest and the general controversy about the company’s future will continue to provide trading opportunities in the stock.
Thursday as I felt the rally was getting long in the tooth, I closed my GS Feb 110/115 call spread that I paid .40 for (by legging into it after first buying the Feb 110 calls prior to earnings) at 1.65.
Thursday night SBUX reported their fiscal Q1 and all systems were a go, much like MCD a week earlier, the stock was trading very near its all time highs and expectations seemed to be running hot into the print. Normally this would be a great candidate to short into the event, but this is not a strategy that appears to be working in this earnings season. I laid out Feb Put Fly, as a way to fade the event in an effort to spend as little premium as possible, while defining risk, isolating a move back to near-term support. The company put up a good qtr and offered guidance that was decent and the stock was down at one point Friday a little more than 2%, which would have made the Feb 47/45/43 Put Fly that I detailed profitable with the stock around $47. I guess the point here with a lot of names trading near all time highs that it takes a pretty impressive earnings revision (like we saw in AAPL) to get these stocks going from lofty levels without consolidating first.
Lastly on Friday afternoon, I previewed my trade for Options Action, I took a look at GMCR into its fiscal Q1 earnings report next week. I didn’t put the trade on yet, but will look to buy a similar call calendar (selling weeklies to buy March) to what I did last week in NFLX.
Video below is from Options Action about 4 minutes in.