Trading Diary: Feb 6th – Feb 10th

by Dan February 12, 2012 9:11 pm • Commentary

Last week was like a slow grind higher for the first 4 days, resulting in a fairly anti-climatic decline resulting in a push for the 5 day period ending Friday, and even with the SPX practically unchanged on the week, the VIX jumped about 21%, which is a fairly interesting divergence when you consider the inverse relationship btwn the 2 indices.  At some point last week, as equities seemingly drifted higher on fumes, the VIX stopped going down and actually started to edge higher a bit, even before the SPX’s almost 1% down opening on Friday.

6 day SPX vs VIX from Bloomberg LP


This action could be for a couple slightly obvious reasons, one that options traders began to get fairly skeptical of the markets ability to continue to rise without a pullback of more than 57bps all year and came to the conclusion that option premiums were just too darn cheap, or that long holders of stocks and etfs started to get a little uneasy of the fairly easy gains year to date and started to buy protection or possibly replace stock with calls.  Either way, there was greater demand for options pushing the fear index higher, on days that the market inched higher.

While most want to talk about Greece, and their ability to agree upon terms for an austerity plan that will secure their bailout funding (it appears that Greek parliament has approved these measures tonight), I think this is more likely to be a “buy the rumor, sell the news” sort of thing and would expect any strength on this headline as a decent opportunity to get short after Friday’s weakness.

In my opinion, the main event last week, and I think it might have gotten more run financial TV (no, I am not going to suggest Jeremy Lin) was AAPL‘s march towards $500.  Yeah yeah I know if stock was $50 and not $500 maybe this wouldn’t be such a big issue, but I guess what I find so remarkable is that the stock has a $460 billion market cap (bigger than MSFT and GOOG‘s combined) and that it is rallying like a recent net ipo with high short intertest.  The stock has completely gone parabolic, and this is action I have not seen in stocks of this size since well the internet bubble in the late 90s.  In march of 2000, CSCO overtook MSFT to briefly have the  largest market cap in the world, at about $555 billion.   We all know how this story ended, but it took some time, and when you look at the chart below you see that the stock rallied almost 125% from Nov 1999 to its March top of almost $82. I am not for a second suggesting that this could happen with AAPL, but its Crazy to think that CSCO only had about $20billion in sales a year back then to AAPL’s $108 billion last fiscal year.

[caption id="attachment_8802" align="aligncenter" width="300" caption="CSCO Jan 1999 to Dec 2000 from Bloomberg LP"][/caption]


As for my AAPL trading last week, I was obviously a bit early,  I started buying Feb 460 Puts when the stock was $465, and then rolled up when the stock was above 480, and then cut some losses when the stock was $490 and then finally rolled out to March……All in All it was a diaster trading in the name and possibly the worst trade I have had in a very long time….I said on Options Action on Friday (paraphrased) that “trying to short AAPL this week was like living a Jonny Cash song”…..for those of you who are not familiar with his music, it would largely be like having your luck run out, lose your job, lose your woman and end up in some prison named Folsom for a crime you didn’t commit.  Well thats just kind of how it felt trying to pick a top last week in AAPL, do read my own sorta Johnny Cash tune (read here).  It’s kind of ironic that there has been a lot of talk about different chart patterns like Golden Crosses and the like, but AAPL’s runaway breakout over the last 2 weeks could be better described by shorts as the “Burning Ring of Fire”.


Aside from my AAPL debacle, I did do one good thing, on Monday, I bought an out of the money Call Butterfly in the VIX playing for a near term spike in vol, that could have just gotten started based on last week’s action. I chose this structure as calls are very expensive in the VIX and I wanted to define my risk as I recognize that nailing the magnitude and the timing of such a move is a fairly low probability event, so I wanted to find a great risk reward with defined risk.  With the VIX above 20, this spread should perform fairly well if in fact we enter a slightly higher vol environment in the coming weeks.

Aside from those 2 trades, my trading has been light, I have been sitting with some small trading shorts (just the stocks no options positions) that have hurt a bit in names like INTC, MSFT, DELL, while holding onto some March and April calls in CSCO and YHOO respectively that are the result of calendars that worked decently in and around earnings.

Aside from that I took a shot on a Put Calendar into LNKD’s Q4 earnings report in Thursday, with the stock up 18% after reporting a strong qtr and guiding up, I think it is safe to say that this one didn’t work out that well.  I will tell you though that I barely looked at this one on Friday, I knew it would lose about half its value, but frankly I sized it in such a way that If I was totally wrong it wouldn’t make a huge dent in my PnL.   And that is the key to trading especially when you are not hittin’ em that well (as I am not currently).

When in a rut and trying to trade out of hole, it is definitely tempting to try to shoot for the fences and get out with one big chop, but at that point you will be relying on a great deal of luck rather than shrood risk management.

SO for those of you who didn’t close your eyes and just “buy them” on Jan 1st, and you have been battling on the short side for weeks (like me), it will take a little time to get this right and you have to be in a position to pounce when the timing is right… the moral of the story is to trade small until u get your groove back, hit a few singles and get the confidence back and then you will likely find it easier to take a bit more risk from a relative position of PnL strength.