Trading Diary: June 11th – 15th

by Dan June 17, 2012 8:27 pm • Commentary

Last week was a quiet week for us on the trading front, as we recognized the strong likelihood of a generally favorable outcome from the elections in Greece, we were (and continue to be) less confident that result will lead to a lasting rally in equities.  Here is a quick summary with some general comments about trades that we initiated on the week, and ones that we either closed or let expire:  

DAN’s Trades:

IBM – Monday, after the markets gapped higher on the news of a bail-out for Spanish banks, I took the opportunity to re-initiate a short in IBM, by rolling down a bit, buying the July 190/180 Put Spread for 2.05 (stock ref 194.50).    Last month when the stock was $205 I bought a July 200/185 Put Spread, that I closed for more than double the first of the month when the stock was below 190.  I wanted to use some of those gains to get short exposure in front of Q2 report that I feel will clearly demonstrate weakness in enterprise tech spending for hardware and services.

WMT – Also Monday, in our never-ending search for cheap vol, at the money July Puts in WMT looked extremely cheap to me at about 17 vol (vs the 30day realized of about 18 and the 60 day realized of about 20).  With the stock just a couple points from the all time highs made in 2000, I wanted to make a contrarian bearish bet, with defined risk, so I bought the July 67.50 Puts for 1.25 (stock ref 68.15), with an eye towards turning into a put spread as the stock comes my way.

JPM – see Enis’s comments below, but I piggy-backed his thesis a bit and started to leg into a July 32/28 Put Spread, avg cost for the $4 wide spread is .76.

NKE – On Friday I initiated a 1/4 of a position on a short bet on the footwear and apparel maker, betting that the technical breakdown in the stock is foreshadowing weakening footwear trends in China and the U.S. and softening apparel demand in Western Europe, as noted by OTR Global in a research note issued mid week.  With the stock around 101, I bought the July 97.50/92.50 Put Spread for 1.25 (1/5 the width of the spread).  As I noted in the post Friday afternoon, Ideally I would like to see a little bounce before pressing the stock after last week’s sell off, but the price action of consumer discretionary leaders like SBUX and LULU may sugest otherwise.  I will add to this.

Closed or Expired:

GOOG – In May I initiated 2 put spreads in GOOG, one in June and one in July, I was quick to take off June for a quick profit when the stock broke key support at $600, but wanted to give my July 580/535 Put Spread a bit more time to play out, as I felt the stock and the market were a bit oversold on a short term basis I closed this position for almost a double.  I will look to re-short on a rally and in front of what I feel will be a Q2 report that will show weakness in online ad spending as a result of the slowing global economy.

AAPL – As I have become accustomed to this year, in this name, I was a bit early on my short structure that was intended to “fade” what I felt was going to be a WWDC that was certain to be a non-event on the product front.  Back in late May I bought a June 550/520 Put Spread for 6.50 when the stock was 567.25.  At the time I chose the 550 strike as I felt that if it could close below there on news the stock was most likely to find a new lower trading range.   This trade expired worthless and frankly, this is an interesting teaching lesson.  I paid 6.50 or about 1% of the underlying stock price to have short exposure down to what would be a huge support level……since putting the trade on May 22nd, the stock went down to 550 and then up to 590 in front of the WWDC, only to basically settle near the mid-point of that range.  In a sloppy market June 4th, the stock breached $550, and the spread was profitable only briefly, and at that point I had to make a decision, take the small gain or keep it on and stay in the game.  Obviously I chose the latter, but I really don’t have an regrets about this, when I looked at my trading book over the period, I had plenty of bank shorts that were working well, and shorts in names like GOOG, that helped fiance this short exposure.  I guess the real lesson is that if I am only playing for the event, then  initiate the day of.   But this also shows how fleeting options premium can be, I paid 6.50 for this spread on May 22nd when the stock was ~567, with the stock closing a tad higher than 1% a little less than a month later, the premium was all but worthless.

ENIS’s Trades:

JPM – Bought the Jul 31 puts for 1.14 on Tuesday.  This was maybe my worst trade in a couple months in my personal account, as it was a poorly designed trade for a longer-term thesis.  Granted, I expected the Senators to be much more stringent on Jamie Dimon because I figured it would be easy politics, but how wrong I was on that count.  In any case, I got a few questions after the JPM rally of 6% after I initiated this trade, and I have no problem cutting losers, but I also like to do it on my own terms.  With 5 weeks remaining to expiry (that includes earnings and a heavy macro schedule), I am comfortable that I will have a better place to exit this trade.  But make no mistake, at this point, I am managing this trade as a loser where I attempt to minimize my losses rather than a trade where I anticipate a nice gain, as I’ll be happy to get out for flat.
GMCR – Sold the Sept 18/16 put spread at 0.73 on Thursday.  There a few points I’d like to summarize on this trade.  1)  I sold a put spread as opposed to bought a call spread because I don’t see significant upside on GMCR (rather, I see limited downside), and implied volatility is high enough that you need a big move on the upside just to break even on a call spread.  2)  I view this trade as quite separate from the broader market given how uncorrelated this name has traded.  Along those lines, sentiment and headlines feel at capitulation levels for the name.  3)  I sold September because I want to give myself plenty of time for the thesis to play out, as I do see a chance that you have one last puke shot under 20 in the name.
UUP – June 23 calls expired worthless.  We initiated this trade in the spring for 0.17 in anticipation of an escalation of the Eurozone crisis, and though the trade did not work, we have been discussing re-entering a low premium short FXE or long UUP position again as a way to take a swing at this theme one more time.  I like September, as it gives you more than enough time to watch another iteration of bailout, failed bailout, renewed uncertainty for the Eurozone.