Update AZO – Sell Jul 360 puts to close at $9.80, June 28th at 12:20 pm: I just sold my AZO Jul 360 puts that I’m long for $9.80. I initiated the AZO Jul 360/330 put spread for $4.80 with the stock around $378. I then bought back the Jul 330 put for 0.70 on Tuesday with the stock at $372. The stock had a steep fall yesterday on the ORLY pre-announcement, and now sits right at the 200-day ma. AZO has only been below the 200-day ma for 1 day in the past 3 years! I actually think the stock is likely to break it again in short order, but when a stock has such strong momentum, it generally does not die a quick death. So I’m going to take my profits here and wait for a better re-entry on eventual strength.
ACTION: AZO ($356.00) Sold AZO Jul 360 puts at 9.80 to close position that had total premium outlay of 5.50, so 4.30 net profit.
Update AZO – Buy back lower put, June 26th at 10:20 am: I just bought back my AZO Jul 330 puts that I’m short for 0.70. I initiated the AZO Jul 360/330 put spread for $4.80 with the stock around $378. With the stock now at $372 (even with the market higher in that period), I feel confident that AZO’s relative weakness is a sign of more selling to come in the near term. It’s a good example of how time decay can hurt long option positions, as the stock is down 2%, but both my puts are down a good bit. I had been asked a couple times about covering these AZO Jul 330 puts or doubling down on the AZO position when the stock was near $390, and I did not do it because I don’t like adding to losing trades. Now that the thesis seems to be playing out, I want to add to the short AZO delta in a small way by buying back my Jul 330 put for 0.70, especially since the premium has not moved much as the stock has moved almost 5% lower in the past couple weeks.
ACTION: AZO ($371.80) Bought back AZO Jul 330 put at 0.70 that was initially sold at 2.16. Leave long Jul 360 put, initially bought at 6.96.
Original Trade AZO – June 5th at 12:29 pm:
Before saying anything, please look at AutoZone’s chart in the last 5 years:
Since AZO began its incredible bull run in 2009, the stock has not been below its 200 day moving average for any significant period of time. The chart is the epitome of the saying, “the trend is your friend.”
I don’t know much about AutoZone’s business. I’ve seen their retail stores pop up all over my native Tulsa, and their stock chart speaks to a business growing by leaps and bounds. The P/E ratio seems reasonable (16), and the business is easy to understand. And I normally don’t like to short strength. All of these factors would usually keep me away from trying to buy puts or put spreads in a stock like AZO.
BUT, I wanted to know, what odds do I get? In other words, how cheap or expensive is the options market? In AZO’s case, it’s very cheap, as the implied volatility is priced around 25 annualized volatility (refresher on implied volatility here). Yet, the stock moved up almost 70% in 2010, about 20% in 2011, and was already up more than 20% at its highs this year (in less than 4 months). And given its unbelievable run, 25% implied volatility seems grossly mispriced to me. I think it should be closer to 35%.
Now, full disclosure, I have watched this stock for this whole bull run, and I have tried doing this twice in the last 2 years, in both cases watching my premium go to 0. But I am going to try it again today, because this option pricing is cheap enough that I feel comfortable failing a few times as long as I hit the one winner that will render me profitable on the whole situation. As I’ve said before, process over outcome, and the process almost demands that I make this trade again, no matter the outcome.
Here’s the trade:
TRADE: AZO ($376) Buy Jul 360/330 Put Spread for $4.80
- Buy 1 Jul 360 Put for 6.96
- Sell 1 Jul 330 Put at 2.16
Break-Even on Jul Expiration:
- Profits between 355.20 and 330 make up to 25.20, max gain 25.20 with stock 330 or lower
- Losses of up to 4.80 between 355.20 and 360, with max loss of 4.80 with stock 360 or higher
The risk/reward on this trade is better than 5 to 1 for a 15% pull back on a stock that is up 300% in the last 3 years. I picked July because it captures the main upcoming macro events (Greece, FOMC, ECB talk), and I picked the 360/330 spread because 330 is where AZO started the year. Again, this trade is an expected loser based on the odds, but I like the timing given the negative overall backdrop and the fact that AZO recently had its two largest volume weeks in the last 2 years, indicating more aggressive selling.
Calling a top is Risky Business, but sometimes you just have to say, WTF: