Trade Update ORLY – Turning Outright Puts into a Put Spread

by Enis July 24, 2012 3:23 pm • Commentary

Trade Update: Tues July 24th, 2012 at 3:20 pm

ORLY is down another 2% today ahead of its earnings report tomorrow.  Given that it already pre-announced, I don’t expect fireworks from the report.  But the stock is down and implied volatility is up quite a bit from my entry level, and I want to monetize some premium just in case.  I can sell the Oct 85 puts at $2.60 right now to leave me with the long August 90/85 put spread for a total outlay of $0.50, which I am more comfortable holding.

Action: ORLY ($88.40) Sold to open August 85 puts at 2.60


New Structure:

Long ORLY August 90 / 85 put spread for 0.50





Original Post: 12:46 pm EDT – July 12, 2012 By Enis

I had never looked at O’Reilly Automotive until it pre-announced weaker Q2 revs and earnings expected to be at the low end of the company’s previous guidance for Q2 back in late June and caused my AutoZone put spread to end in the money, where I took it off.  Ever since that pre-announcement, I’ve kept a close eye on ORLY as well as AZO, since both have been in such strong up trends over the past 3 years.

Amazingly ORLY is up almost 20% in the past 2 weeks since its pre-announcement intraday lows, which is quite an incredible move.  Today, both ORLY and AZO are up more than 3% because Citigroup made positive comments about the industry in general, indicating in a note today that July sales picked up meaningfully for the group after a weak June.

My first instinct when I saw this rally was to try and buy puts on AZO, but I immediately checked ORLY, and realized that I should follow my own advice.  When you are choosing between 2 assets to buy, buy the stronger acting one.  When you are choosing between 2 assets to sell, sell the poorer acting one.  So I’m going to initiate a long put trade on ORLY as it approaches important resistance today:



I’ve been broadly bearish on markets, but have not much trading in the past week because I don’t want to press on weakness.  ORLY’s recent bounce after previously telegraphed weakness gives me a great entry to initiate a short position on a stock that has bounced substantially, in a broader market backdrop where it is dangerous to initiate new shorts.  I also think the general trend of fund managers being forced to sell cyclical winners might take hold over the next month as earnings season disappoints expectations.  ORLY is now up more than 10% on the year after its recent rally.

More interestingly, ORLY is not even a cheap stock.  It’s a 20 P/E growth name with no dividend dependent on U.S. growth, and its recent warning is likely the beginning of a longer term trend, not the one-time dip that the market has now priced in based on the recent rally.

Given ORLY’s recent volatility (down almost 20%, up almost 20% in the past month), I don’t want to buy a put spread, but rather am going to buy just an August put that I might look to spread on a resumption of its selloff.  Here’s the trade:


TRADE: ORLY ($91.30) Bought the August 90 put at 3.10
  • Bought 1 August 90 Put for 3.10


Break-Even On August Expiration:

  • Profits below 86.90, losses between 86.90 and 90.00, max loss of 3.10 above 90.00