Trading Diary July 23rd – July 27th

by Dan July 29, 2012 5:48 pm • Commentary

Here is a quick recap of all of the trades that we initiated, closed or expired in the week that was July 23rd to July 27th:  

Monday July 23rd:

TRADE: LEN ($31.05) Bought the August 29 / 24 Put Spread for 0.60

Enis:  The comeback of the housing market has been a persistent theme throughout the first half of the year, as homebuilders have registered their strongest first half equity gains since the collapse of the U.S. housing market.  Their domestic tilt has also offered comfort to investors concerned about international economic weakness.  However, with many signs that growth concerns are moving to U.S. shores, I’d been waiting for a good entry for a contrarian play on LEN since late June.  With the seasonal peak of housing season past us, housing data has started to taper off, and the optimism priced into housing stocks seems primed for disappointment.  My main concern in managing this position is time decay at this point.  I will likely either exit the position or roll to September on the next decline.  Read post here.


Tuesday July 24th:

Action: GME ($15.60) Sold to Open October 13 puts at .43

New Structure:

Long GME Oct 17/13 Put spread for 1.00

CC: The thesis here is that Gamestop is in a business (brick and mortar video game sales and rentals) that won’t exist in a few years so I think the stock has way more downside. The issue with all of these types of trades is timing. Therefore the sale of lower put is premium protection against the stock stabilizing or having a dead cat bounce after its recent march lower (read trade update here).


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

Enis:  Since I first initiated the ORLY Aug 90 puts, the implied volatility made a dramatic move higher ahead of the earnings report on July 25th.  As a result, I wanted to sell some premium to monetize that move higher in volatility, as I did not expect earnings to be a significant event.  Indeed, the volatility crush after earnings was quite dramatic.  Outright puts actually lost money even as the stock initially opened lower.  ORLY was under selling pressure on both Thursday and Friday after earnings, and I held the put spread given my low cost of $0.50 at this point.  I expect ORLY to move below $85 if the broader market shows any resumption of weakness.  Read post here.

TRADE: AAPL ($601) Bought the Aug 540 / 520 1×2 Put Spread for a .55 Credit

Dan: After taking a long hard look at AAPL heading into its fiscal Q3, to express a bearish view, I bought a 1×2 Put Spread, a trade structure that we have used sparingly on the site largely because we don’t usually think it is appropriate for retail to sell naked puts.  AAPL is a little different though than most other stocks, and as the stocks reaction to their earnings miss and Q4 guide down shows, investors use every sell-off as an opportunity to buy more.  This 5-10% “discount bid” for the time being puts a floor in the stock and when downside puts become expensive ratio spreads look attractive.  I specifically chose strikes of my Aug 540/520 1×2 Put Spread (read here) that would result in a credit so that if the stock had a muted negative reaction, did nothing or went up I would make money and my max risk on Aug Expiration is that I would get Put the stock down 16.8% at $500, while I still had the opportunity to make up to 20.60 btwn 540.60 and 499.40. With the stock retaking some lost ground since the Wednesday lows, the postion is a decent hold at at his point as it seems very unlikely that I can lose money on the trade in the next 3 weeks.

Enis also introduced some risk mitigation strategies for AAPL longs or those looking to define risk into the potentially volatile event (here)

Wednesday July 25th:

TRADE: AAPL ($574) Bought the Aug 555 / 535 put spread for $4.25

Enis:  Perhaps I should have known better than to try and buy a put spread on AAPL.  The main impetus for my decision was the idea that the earnings miss might finally be a catalyst for large institutional investors to move funds out of AAPL (an exceptional winner so far this year) and into the broader market.  While that certainly seemed to be the case in the second half of the week (AAPL did underperform the broader market significantly), the market’s overall strength took AAPL higher with it.  I view this week’s central bank releases to be classic cases of “buy the rumor, sell the news.”  Particularly since I don’t expect the Fed to announce QE3 just yet.  If I’m correct, then we should see the market to move lower by Thursday or Friday.  And AAPL should be a leader on the downside.  If I’m wrong, I will probably take AAPL off for a loss by Friday.  Read post here.

Action: MSFT ($29.00) Sold to close the Aug 30 puts at $1.39, for a $0.69 gain

Enis:  This was a case of taking off a quick winner after the earnings move.  I think long-term business trends are still tilted against MSFT, but the stock made a quick 5% lower after earnings, where it made sense to take profits on the trade.  MSFT is on my radar for future strength though (and conversely, I have started to watch GOOG as a stock to use for bullish trades in the future, due to its inroads in both software and hardware in competition with AAPL and MSFT), where I might look to reinitiate a long put or put spread position.  It should be especially interesting to watch into the release of Windows 8.  Read post here.

Thursday July 26th:

TRADE: GS ($97.40)  Bought the Sept 90/80/70 Put Fly for .90

Dan: With the SPX up almost 1.5% out of the gate Thursday morning on comments from ECB head Draghi about their continued commitment to fixing the EuroZone sovereign debt/banking crisis, I wanted to add to my bearish U.S. bank exposure.  Late week strength in equities was in my opinion a head-fake for the restest of the June lows that we are likely to see in the next 2 months once investors finally get the point that global growth has stalled and at this stage of the stimulus game their is very little in the near term that central bankers can do to stimulate growth as opposed to goose up equity markets.  GS appears to be a great short having little to do with their exposure to Europe, but more so to external factors hindering their ability to grow sales and earnings in the fashion they have been accustomed to in the past. Read post here.

TRADE: AMZN ($218) Bought the July 27th weekly / August 195 Put Calendar for $1.30

Enis:  As I mentioned in the post, I liked the risk/reward offered by the calendar on AMZN because the July 27th weekly options were quite rich relative to the rest of the term structure.    I got the direction dramatically wrong, though the trade still has 3 weeks to expiry, and the August 195 puts are worth about $0.50 as of Friday’s close.  I will look to salvage some premium in the next couple weeks, as it looks quite unlikely that AMZN will close below 195 by August expiry.  I think the structure had a lot going for it, but the reaction of AMZN investors to the earnings release amazed me once again.  The faith remains strong, and this trade is likely a loser as a result.  Read post here.

Action: SBUX ($51.94) Sold to close Aug 50/45 Put Spread for .97, .12 profit.

Dan: Closing this put spread was my worst trading decision of the week.  Almost a month ago I entered an Aug 50/45 put spread (here) as an extension of my thesis that slowing global growth was likely to impact U.S. multinationals who rely a good deal for future growth from markets such as China, Brazil and Europe.  After NKE’s disappointing results in late June, I thought high valuation consumer discretionary peer SBUX was a prime short candidate.  After sitting with this position for a month (and the stock only down about 2% from where I initiated it), just hours before their earnings report Thursday, I decided to close the position for a small gain and avoid the risk of the results not being as bad as I expected and having the position rendered near worthless overnight.  Much of this decision was based on pure emotion, I have plenty of bearish bets on at the moment, and with the market ripping on Thursday and most if not all going against me, and looking at WFM up 11% after their beat and raise, I felt it prudent to cut my potential losses.  Risk management got the better of me on a day when my trading book was turned upside down.  I got lots of email from readers some supportive, and understanding of the decision , others lets just say not so much, but there is a very important lesson here, while trading in these volatile markets we have to look at our portfolios from a birds eye view and not always position by position.  The fact of the matter is that my bearish bets have been making me money for a couple weeks, I had trimmed many in the last week or so and on Thursday afternoon with the market where it was one individual winner, which was basically a coin-flip into earnings was not going to change much for my portfolio one way or the other. While I was clearly disappointed when I was not long the spread Friday morning when the stock was down 11%, I would have been much more disappointed if the stock was up 10% and I had not considered closing it and avoided what I felt had the potential to be a binary trade.


Friday July 27rd:

Action: FB ($22.95) Sold to close FB July weekly/ Aug 27 Put Calendar at .15 for a .25 loss

Dan:  While SBUX was my worst decision of the week, not adjusting my stikes in my FB Put Calendar was the most frustrating.  With the stock down almost 8% Thursday in reaction to ZNGA’s disastrous quarter and guidance, and trading at the strike of the spread, I just felt that the company was going to have to some levers to pull in their first quarter as a publicly traded company.  Well that obviously wasn’t the case, and while I entered the position initially because I wanted to game the Aug 16th lockup expiration, I ended up having small premium losing trade (here) because the stock way overshot the bands in which this trade could be profitable.  By not adjusting my stikes I was essentially playing for a muted downsize move up or down and that is obviously not what we got.  I could rant on and on about FB, and to be very honest I think there is a decent shot that you see this stock in the teens in the months to come, they have lost almost all credibility in investors eyes, just the investment banking underwriters of the deal and the wall street analyst community have.  I believe in the near-term the only chance for this stock to get back to $3o is if they were to make a bid for Twitter, an unfortunately press reports already have AAPL hovering around that little bird.


TRADE: GMCR ($17.90) Bought the Dec 14 / 7 1×2 put spread for $1.30

Enis:  This was a very small, speculative way to play a busted stock into earnings.  Implied volatility is exceptionally high into earnings since GMCR has averaged a greater than 20% move over the past 8 quarters.  I did not put much premium into this trade as I don’t have high conviction, but it’s an interesting structure to play for a RIMM or NFLX type of scenario, if the competition does indeed eat GMCR’s lunch.  The recent breakdown of the stock to new lows after many months of consolidation has strengthened the bearish case.  Read post here.