Last week was the second in so many weeks where anticipation of pending news events dominated traders’ minds. Interestingly, the Monday after the Greek elections was exceptionally light volume, and all eyes turned to the Fed. As we laid out here and here, we expected the Fed to disappoint, and our SPY weekly puts were in anticipation of a sell the news event.
Probably the most interesting trading day of the week for us was Wednesday, as the market didn’t sell off like we were expecting after the Fed announcement of Twist extension at 12:30pm. We debated adding to our positions, which were already mostly short. This was a case where having a plan for trading an event helped. At the end of the day, we had strong conviction that the news was still a sale, and on Wednesday afternoon we felt like it was a gift that markets weren’t lower. So we added to NKE, IBM, and C put spreads as well. BUT, when the quick gains came on Thursday, we wanted to take that risk off after the thesis played out, and return to a longer-term focus.
One last theme to note: We are focusing on U.S. multinationals for our put spread ideas. NKE, IBM, C, and GE are all names with significant international exposure that will continue to weigh on the stocks over the next few months in our view.
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:
June 19th, 2012
SPY ($135.65) Bought June 22nd Weekly 135 Put for .70 (here)
This was a clean way to play for a binary event. Though we thought it was unlikely, we’d much rather risk 0.70 for a 1 week put than short SPY into a pivotal Fed event. Our exit was a bit early on Thursday, but that was mainly because we wanted to book profits given the other put spread trades we added late Wednesday.
June 20th, 2012
ACTION: NKE bought July 97.50/92.50 Put Spread for 1.00 (stock ref 101.50) resulting in a new average of 1.175 (here)
June 15th, 2012:
ORIGINAL TRADE: NKE ($100.93) Bought the July 97.50 / 92.50 Put Spread for 1.25 (here)
We added and then sold the NKE around the Fed event for the reasons mentioned above.
C ($28.75) Bought the July 28/25 Put Spread for .70 (here)
We bought the C but did not sell it on Thursday near the close like the IBM and the NKE, even though we thought the banks might bounce after the Moody’s downgrades after Thursday’s close. We view C a lower chance (than non-financial stocks like IBM or NKE) of participating in a broader market rally as long as European banking system stress remains in focus.
IBM: Action: Bought more July 190/180 Put Spread for .97 (stock ref 199.55). New average is about 1.50. (here)
IBM ($194.50) ORIGINAL TRADE: Bought the July 190/180 Put Spread for 2.05 June 11,2012 (here)
We added and then sold the IBM around the Fed event for the reasons mentioned above.
FB: Sold to close July 33 calls at 1.10, bought to close 2 July 38 calls for 0.15. (here)
FB ($29.55) ORIGINAL TRADE: Bought July 33 / 38 1×2 Call Spread for .65 May 29th, 2012 (here)
The original FB ratio call spread that we did was with the stock trading around $29.50. We had no desire to catch a falling knife by buying the stock, but the 33/38 ratio call spread offered a low risk way to play for a bounce in the name. We were obviously a bit early as the stock eventually fell all the way to $25.50, but this week’s strong rally moved this trade to a profit, and we were quick to take our gains since we are also long the Aug 30/34 1×2 ratio call spread that we feel more comfortable holding for a while.
June 21st, 2012
ACTION: NKE sold half July 97.50/92.50 Put Spread at 1.60 (stock ref 18.60) this was the portion that I bought yesterday at $1.00 (here)
ACTION: IBM Sold 1/2 July 190/180 Put Spread at 1.90 (stock ref 194.45). (here)
SPY SOLD June weekly 135 Puts to close at 1.00 for a .30 gain. (stock ref $134.30 ) (here)
All 3 of these previously mentioned.
June 22nd, 2012
TRADE: GE ($19.76) Bought the Aug 19 / 17 Put Spread for 0.30 (here)
We wanted to use Friday’s strength to initiate another longer-term short thesis based on the weakness in international markets. GE has been surprisingly resilient in the face of building risk factors globally, and the vol and skew profile of GE options offered a good entry point for this trade.