World equity markets finished the second qtr with bang to say the least, the DAX closing up 4.3% Friday, and the SPX up 2.5%. In a quarter that saw new multi-year highs, only to quickly drop about 8% from those levels in a short time, while fear remained persistent for the better part of May and June, as evidenced by fairly wild swings in the VIX from mid teens to mid 20s, and almost all the way back!
Last week our trading was fairly sparse as we were slightly apprehensive of initiating too many new positions prior to the EU summit, but wanted to stick to a couple of themes on the short side that has worked for us for most of the last 3 months, and we are gonna stick to what is working, until it doesn’t. First theme, short U.S. multi-nationals that rely on near-term growth from Europe and emerging markets, and U.S. short banks, as we feel revenue growth opportunities for the balance of the year, that were already challenged by heightened regulatory scrutiny, are now with the revelation of JPM Whale’s losses in April/May, will only place greater near term scrutiny on prop trading which many large banks rely a great deal on for earnings.
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:
Monday June 25th, 2012:
Enis, initiated a short term portfolio hedge against some single stock short positions in front of the EU Summit, later in the week.
When he did so, he wrote the following:
BUT, this week is the one that worries me on the potential for a bounce because of the playbook for previous EU summits. European policymakers, ex-Germany, are going to do everything in their power to induce confidence throughout the week based on the setup of their expectations. I have little confidence that the summit induces any lasting rally given the headwinds. In fact, I anticipate markets to feel the ultimate downer after the summit, and we should retest the lows of the year.
On Tuesday he took it off for a small loss, but his initial thinking was spot on. Enis’ comments: I just wish I re-read it before I took off the trade on Tuesday. Tuesday’s decision was rash on my part because I got greedy. In reality, even if the summit was a disappointment, I should have been willing to watch my SPY calls go to 0 because my other positions would have been quite profitable. Instead, I tried to make money on everything, and lost as a result. It’s a good lesson in risk management.
Also on Monday, with the markets down about 1% in the morning, I took the opportunity to take my cost off of the table in a recently initiated short position in Citi. WIth the stock down about 8% in about 3 trading days, since buying the July 28/25 Put Spread for .70 on June 20th. I closed half of the position for a double, now leaving me with a postion I can’t lose on.
Tuesday June 26th, 2012:
On what was a relatively quite day for us on the trading front, I conceived of what I admitted at the time was a trade that didn’t have a strong likelihood of success, which is often times the result of boredom. Looking ahead to RIMM‘s earnings announcement on 6/28, I decided that if I had to play, I would play for some kind of strategic action for the company’s assets. With the stock a little above $9, I wanted to look for a defined risk way to play for short squeeze on any good news.
TRADE: RIMM ($9.10 ) Bought June29th weekly 10 Calls for .17 (then the next day I avg in at .13, resulting in a new avg of .15)
The thought was that if I was risking what I was willing to lose, on the off chance that there was any news on the asset monetization front, that the stock would be up big, not to different than the massive move that AOL had in May when MSFT agreed to purchase their patent portfolio for a sum equal to the company’s market cap at that time. Obviously we didn’t get any news, the stock cratered, and the Puts expired worthless. Dumb trade, low probability of success, but I full expected to lose money. Still sucks, but thats what we do as traders, we take some slightly educated shots.
Wednesday June 27th, 2012:
In our continued effort to look for U.S. multinationals that will feel the pinch of a recessionary environment in Europe, slowing growth in Asia, and a U.S. economy that is limping along on the heals of weak job growth, HOG hit my radar first on a technical basis (chart sitting on the neckline of a nasty head and shoulders top formation), and then on its fundamental as HOG management’s comments about dealer de-stocking at an analyst meeting Tuesday seemed more like a deliberately confusing statement about demand rather than inventory management.
Thursday June 28th, 2012:
On Thursday Enis closed one trade and initiated a new one. First he closed a winning position in AZO, Enis’s comments: This was really a technical set-up that played out as expected, and the timing was right to take it off. The stock came down to test its 200 day, and as I wrote in the post, it has spent only 1 day below the 200 day moving average in 3 years. No doubt that investors were watching that level, so given that I owned July options, I didn’t want to risk decay if that level held. I will keep my eye on names like AZO and CMG to see how they behave over the next month after big selloffs this week.
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.
Also on Thursday, Enis doubled down on his bearish view on JPM, his comments here: I am quite convicted on the long term thesis that JPM is going to lose its untouchable perch among U.S. banks. The issue with trading options is timing that thesis correctly. My July 31 puts were poor timing from early June, but when I felt like I had a better entry this week, I did not want to miss it just because of my earlier mistake. So even though I called it doubling down, this thesis is a longer-term belief in the destruction of JPM earnings power going forward. The reaction to the mid-July earnings report will be especially telling.
Also on Thursday, heading into NKE‘s earnings that evening, I took off half of the initial July 97.50/92.50 Put Spread that I bought on June 15th for a $1 profit as I wanted to reduce the risk of a snapback as the stock had been down about 5% since putting the position on.
Friday June 29th, 2012:
Well as you have heard me say, “you won’t go broke taking profits” you may hear other traders say, if it ain’t broke don’t fix it”……well many would say taking half off of my NKE position an hour before the company posted their first earnings miss in a while was a bit of a boneheaded move, well I don’t exactly see it that way, if my long career in this business has taught me anything, is to take my cost off of the table when possible into high unpredictable events. With NKE down about 10% Friday morning, I sold the second half of my initial position for about a $3.30, gain, not to shabby, as this wasn’t exactly an earnings play when I put the position on.
With the spread’s max worth of $5, and having to wait till July expiration to make the full width, the decision to close out the position was an easy one.
On the heals of my success in NKE, I wanted to look for a similarly correlated name to the footwear and apparel manufacturer and look to press a short that could be facing similar headwinds to NKE. SBUX fit the profile to a T.
Video from Options Action: