Trading Diary: July 16th – July 20th

by Enis July 22, 2012 7:25 pm • Commentary

With the signs of a reversal stacking up, Friday’s move lower in many stocks where we have outstanding positions (like SBUX, MS, and ORLY) gave us a sigh of relief that our work was not for naught.  Having said that, our preference going forward is to sit on our hands and start taking off winners if the market moves lower back into the 1300-1340 support range that has built up over the last few months.  We own a lot of August premium, and feel confident that the next 50 handles are lower, but we want to stay nimble given the choppiness of the market.


Here is a quick recap of all of the trades that we initiated, closed or expired in the week that was July 16th to July 20th:  

Monday July 16th:

Trade: C ($26.71) Bought the Aug 26/23 Put Spread for $0.65

Dan: If you have been an avid reader of RiskReversal for the last year you have become all too familiar with our undying need to short U.S. bank stocks, but with defined risk.  We have been sellers on rallies for months and on Monday following Citi’s Q2 results I wanted to roll my short down and out a bit.  The week before I had closed a profitable trade in the name, the July 28/25 Put Spread, but with the news out of the way I wanted to get back in there.


Tuesday July 17th:

Action: GRPN ($7.45) Sold Second Half of July 10/5 1×2 Put Spread at $2.45.

Dan:  We took off a position in GRPN that was more of a teaching lesson than a home run.  Last December we were looking for a way to play for a collapse in GRPN shares and that ratio put spreads without any tail risk were the way to go, even though they were a tad expensive (read initial trade description here).  We had closed half of this positon for a double a few months back and took our cost off of the table, but now with the stock down 66% (yes we were pissed we didn’t just short it, but borrow was very high) we chose to close the second half for 3.5x what we it was initiated for.

Trade: INTC ($25.55) Bought the Jul/Aug 24 Put Calendar for $0.22

Dan: Heading into INTC‘s Q2 earnings, I wanted to take less of a directional view as I had already closed a profitable bearish trade in INTC the week before.  I opted to sell the move in July options and set up for what I think will be a rocky Aug. Put Calendars seemed like the way to play for those with a slightly tempered bearish view.

With INTC closing right at the level where I bought the Put Calendar, the July 24 Puts that I was short expired worthless and now I own the Aug 24 Puts out right for .22, and seeing that they closed at .21 on Friday, I have this trade right where I wan it.  On the next big down day in INTC, when vol is elevated in AUG, I will look to sell a lower strike Put against the 24s that I own and further reduce my cost basis on the position.


Wednesday July 18th:

Trade:  VIX (16.10) Bought the Aug 20/25 call spread for $0.75

Dan: on what seemed like the 4th day of a massive rally (while the S&P was only up a little more than 1% on the week, as a team we were just really irked by the price action that we would categorized as all too complacent.  While we have plenty of bearish positions with short exposure in single stock names, Enis and I both agreed that calls in the VIX looked particularly attractive given what we feel is likely to be a volatile period in the coming weeks.  Enis chose to buy Aug 19 calls outright with an eye towards legging into a spread on a vol spike (per his comments in “QuickHits” I chose a call spread with lower premium, that had similar break-even characteristics, but with gains capped.

Action:  AXP ($58.36)  Sold first half of July 57.5 / 55 Put Spread at $0.28

Dan: Heading into AXP‘s Q2 earnings call, I took off half of the July 57.50/55 Put Spread that I bought for .45 a couple weeks earlier for a .17 loss heading into the print as I wanted to reduce my risk of a total loss of premium.

Thursday July 19th:

Action:  AXP ($56.90) Sold the second half of July 57.5 / 55 Put Spread at $0.90

Dan:  AXP disappointed on revenues and the stock was down about 3.5% on Thursday morning, and I closed the second half of the position for .90, so my average sale price was .62 and the whole position yielded a .17 profit.  Not a huge winner , but given my risk avoidance decision that proved to be wrong, the outcome was better than a sharp stick in the eye.

Trade:  MSFT ($30.65) Bought the Aug 30 Put for $0.60

Enis:  The Windows 8 cycle seems over-hyped (see one particularly caustic review here), and the classic MSFT Windows business is already under pressure from competitive forces in both hardware and software.  I expected any enthusiasm for MSFT from the positive sector move in technology to end after the earnings report, and I hope Friday’s reversal from higher to lower by the close is a harbinger of a larger move lower for MSFT in the weeks ahead.  I plan to sell the Aug 28 puts against my long Aug 30 puts if the stock moves lower.  Read the full post here.

Friday July 20th:

Action:  PHM ($10.90) Bought back the short July 10/12 call spread for 0.90

Enis:  The general thesis here of long TOL vs. short PHM, initiated all the way back in March, would have been a splendid single stock trade idea, as TOL outperformed PHM by 20% since that time.  However, the timing of the options idea turned out for the worst, as we were long TOL June calls vs. short PHM July call spread, which resulted in a small loss on the spread trade as a whole.  Read the full post here.

Action:  SLV ($26.50), Sold the Jul 27 puts at $0.50 to close

Enis:  This was my most frustrating trade of anything I have recommended on the site so far.  The reason?  I managed this trade very poorly.  Many of you know that I try to get out of my options positions where I have a longer term directional view when the options maturity date is less than a month away so I don’t have to pay too much time decay on my position.  With SLV, I was stubborn that we would see a break of the $25.50 level, even though SLV just kept bouncing between 25.50 and 27.50 for most of the past month and a half.  As a result, I ended up watching most of my premium decay, even though SLV was 4% lower from where I initiated the trade at the start of June.  The 75 cent loss is an expensive lesson in monetizing your short-dated premium when the market gives you a chance.  Read the full post here.

Trade:  FB ($28.95)  Bought the Jul 27th weekly / Aug 27 strike put calendar for $0.40

Dan:   Previewing FB’s first quarterly earnings report as a public company (here), I struggled with strategies that could make sense for an event which has no history to base possible outcomes and an implied move that seemed a little hefty.  As a team we came to the conclusion that calendars probably make the most sense and obviously I chose a downside put calendar to take advantage of the high implied move in the weekly options, while possibly setting up for weakness as we get closer to the company’s Aug 16th lockup expiration.

Expired:  JPM Jul 31 puts

Enis:  My timing was terrible on this trade, but my short thesis remains.  I doubled down on this trade after the Jul 31 puts went against me, and am currently long the Aug 36 puts and short the Aug 35/37 call spread.

Expired:  Half of XLF Jul 14/12/10 put fly, first half closed for a double

Dan:  This trade was basically a wash since I closed out the first half for a double on a down draft in May.

Expired:  WMT Jul 67.5 puts

Dan:  The trade went against me from the get go, and I never had the opportunity to take any real profits or spread to lower my break-even.

Expired:  CHK Jul 14/12 put spread

Enis:  This trade was another that suffered from poor timing.  CHK stock is around the same place where I initiated this put spread, but of course my time ran out.  I am still overall bearish on CHK, but I will stay away from the stock unless it makes an extreme move in either direction.