Trade Update HOG: Closing Half Sept Put Spread for a Double

by Dan August 1, 2012 10:01 am • Commentary

3rd Trade Update Aug 1st, 2012:  Talk about Technicals leading Fundamentals…..looking at the chart below that I posted on June 27th when I first bought a Put Spread in HOG:

HOG Head & Shoulders chart 6/27/11 to 6/27/12 from Bloomberg


The point I made yesterday when I rolled the spread down and out to September was that the HUGE $45 support level had now apparently become resistance.  The chart is broken and now the fundamentals confirm the story.

With the the stock now down close to 10% this morning, I sold half of this position for a double.

Action: Sold to close Half of HOG ($39) Sept 41/37 Put Spread at 2.00 for a 1.02 gain.

I will stick with the balance of the position for the time being as I am now “Playing With the Houses Money”.


2nd Trade Update July 31st, 2012 at 1pm: Prior to tomorrow’s opening, HOG will report Q2 earnings, the options market is implying about a 7.4% move vs the 4qtr avg move of about 6.4%.

Since first trading in the name back in late June and then rolling into my current Aug position, nothing has changed on a fundamental basis in my view, and visibility has probably gotten worse for the company over the last month.

Additionally, the technical picture has gotten worse, as the stock has broken below the $45 neckline support of the massive head and shoulders top pattern it has been forming since Feb/March and now that previous support of $45 is serving as healthy resistance as evidenced by its failed test of that level over the past couple weeks.

HOG 1 YR chart from Bloomberg

At this point I am going to do what I should have done in my SBUX short last Thursday and roll out and down a bit, and use the profits from the Aug spread to finance short exposure that will be less dependent on tomorrow’s earnings announcement.  With COH down over 16% today on an earnings miss, and much of the consumer discretionary space under-performing in sympathy, I want to stick with this theme as I think it will have legs for months.

Action: HOG ($43.38) Sold to close Second 1/2 the Aug 45/40 Put Spread at 2.05 for a 1.10 gain, which is the exact level I sold the first half of the position at.

Now I Want to Use the profits of the Aug Put Spread and roll down as an earnings miss and or cut to guidance will likely cause the stock to go back to unchanged on the Year (stock currently up 11.5%).

NEW TRADE: HOG ($43.27 ) Bought Sept 41/37 Put Spread for .98

-Bought 1 Sept 41 Put for 1.68

-Sold 1 Sept 37 Put at .70

Break-Even on Sept Expiration:

Profits btwn 40.02 and 37, make up to 3.02, max gain 37 or lower make full 3.02

Losses of up to .98 btwn 40.02 and 41, and max loss of .98 above 41.00



Trade Update July 12th, 2012 at 10:23am:  Since adding to my July Put Spread on Tuesday, by rolling to an Aug Put Spread, HOG is down about 8.3% in just 2 trading days.  SO the gains in the Aug Spread have more than made up for my losses in the July Spread that I closed yesterday, and now you guys know the drill, I am going to close half of the Aug spread for more than a double. I think the stock will likely go to $40 on continued market weakness, but such a quick drop in such a short period of time I am going to take some money off of the table.  Q2 earnings will be Aug 1, so we have some time.

Action: HOG ($43.38) Sold 1/2 the Aug 45/40 Put Spread at 2.05 for a 1.10 gain on half.



Trade Update July 10th, 2012 at 12:15pm:  I was a bit early, but nothing has changed here, not sure why the stock is up 3.5% today, but I am going to stick to my guns here and roll this position out a bit to August which will catch the company’s Q2 earnings release.  I will take the loss soon enough on the July Put Spread that I bought, but not yet, with the stock up about 5% since putting the July spread on 2 weeks ago, I am going to hopefully wait for a re-tracement and then sell.

But what I am not going to  wait for is to add an Aug Put Spread.


TRADE: HOG ($47.30) Bought the Aug 45/40 Put Spread for .95
  • Bought 1 Aug 45 Put for 1.40
  • Sold 1 Aug 40 Put at .45

Break-Even on Aug Expiration:

Profits of up to 4.05 btwn 44.05 and 40.00, max gain of 4.05 below 40.

Losses of up to .95 btwn 44.05 and 45, with max loss of .95 at 45 or higher.





Original Post June 27th, 2012: New Trade HOG: As Usual I am Sniffing Sizzling Bacon

The weakness today in consumer discretionary names like UA, RL, TIF, CMG, PNRA, on what appears to be a fairly broad rally today, got me scanning for other stocks that I think could be vulnerable in a market where investors are looking to protect gains in winners, are worried about a deteriorating global macro environment hurting near term visibility, which would cause what appears to be a move out of cyclicals into more defensive sectors such as utilities.

HOG caught my eye purely on a technical basis as just this week broken its up trend channel that has been intact since last fall, sitting on huge support and appears to be a textbook head and shoulders top, with current level of about $45 the neckline.

Year to Date HOG chart from Bloomberg


Today’s weakness is the result of  the company’s commentary at an analyst meeting yesterday that might have raised more questions than it answered as they did not comment on the current trends or business outlook.  Here was a quick rundown from Bloomberg today siting a research note from UBS:

June 26 (Bloomberg) — Harley-Davidson noted at yday analyst meeting 2Q gross margin may be a little below Q1 35.9% vs. its comments of “pretty much in line” with 1Q from its April call, UBS analyst Robin Farley writes in note.
• Reduces 2Q gross margin est. to 35.5% from 36.9%, 2012 gross margin to 34.8% from 35.4% (vs HOG’s yr forecast 34.75%-35.75%) on stronger dollar
• Reduces 2012 EPS est. to $2.77 vs prior $2.91, Bloomberg consensus est. $2.80; lowers 2013 to $3.31 vs prior $3.47, consensus $3.57
• HOG said it’s likely to further reduce inventory in dealer channel in ’13, due to expansion of flexible mfg to KC plant in 2014, according to Farley
• Further dealer destocking in ’13 may also be due to HOG unintentionally overproducing bikes in 4Q11, 1Q12 in anticipation of 2Q ERP implementation that fell through
• Keeps neutral, PT $49 down from $50

MY VIEW: I Don’t have any particular insight into HOG’s fundamentals, but it seems that the street is fairly positive on the name with 14 Buys, 4 Holds and only 1 Sell.  The company is fairly levered for a company it’s size, it has about $5.5b in net debt with a market cap of about $10b (they have $1.4Bil in cash).  It appears to me that if we were to head back into a period of uneasiness as it relates to indebtedness of nations, states, individuals and companies that Harley’s debt load could stick out like a sore thumb.  That is by no means a great reason to short the equity at a time where things seem ok, but the company clearly sounded a bit more cautious yesterday and any continued caution on their expected earnings call July 19th, could cause a technical breakdown in the stock.


MY TRADE: I am going to start to nibble at a July Put Spread in front of earnings and in front of what I feel will be a near term test of 1250 in the SPX. As I said above I have no strong belief that the company will miss current earnings, but any continuation of poor visibility and this stock could be trading below its current above market multiple.


TRADE: HOG ($45) Bought the July 44/40 Put Spread for .85
  • Bought 1 July 44 Put for 1.28
  • Sold 1 July 40 Put at .43


Break-Even on July Expiration:

Profits of up to 3.15 btwn 43.15 and 40.00, max gain of 3.15 below 40.

Losses of up to .85 btwn 43.15 and 44, with max loss of .85 at 44 or higher.

Trade Rationale: Implied vol aint exactly cheap, which is why I am spreading it (at the money implied vol in July is about 40 vs the 30 day realized vol of about 35 and the 90 day realized vol of about 30).  If we see a continuation OUT of high growth names that have worked ytd (HOG up 15%), HOG could be a source of funds for some investors.