Trading Diary: Jan 7th – Jan 11th

by Enis January 13, 2013 8:23 pm • Commentary

REMINDER: Dan and I will be hosting a Webinar tomorrow at 4:30pm eastern entitled, “Anatomy of an AAPL Earnings Trade With Options”.  We will run through the qualitative and quantitative inputs that we use to evaluate a potentially volatile earnings event, and walk listeners through the inputs that we use too ultimately arrive at our event trades.

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Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was Jan 7th thru Jan 11th:  

Tuesday, Jan 8th:

TRADE: Sold to Open the STZ ($35.80) Feb 35 straddle at $5.20, Bought the Feb 30 / 40 strangle for $1.80, collected $3.40 net credit on the structure

Enis:  STZ vol heading into earnings was near historical highs compared to the past 2 years. In addition, the company had obvious positive earnings momentum and positive sentiment following the announced acquisition of Crown Imports, but the stock’s 80% rise in the past year reflected much of that good news.  Combining high vol with my expectation that the expected good news was priced in, I settled on a range trade that would benefit from a subdued earnings move and lower implied volatility going forward.  STZ did indeed underperform the expected options market move, and the structure closed the week around $2.80.

Read here

Wednesday, Jan 9th:

Name that Trade:  HLF Ahead of Company Presentation

Enis:  We highlighted the exceptionally high implied volatility for Herbalife options ahead of its highly anticipated company presentation on Jan 10th.  The stock’s realized volatility has been above 100 over the past month, as the stock went from 45 to 26 and back up to near 45.  The event turned out to have little effect on the stock as it closed the week at $40, and 1 month implied volatility declined from the mid-80s down to near 70, a good example of why we generally like to sell short-dated volatility ahead of events like this (though we stayed away here given the wide bid / offer and no great structures in the options. Read here

Thursday, Jan 10th:

TRADE:  WFC ($35.08) Bought the Jan / Feb 35 call calendar for $0.24

Enis:  Though the implied move for WFC earnings did not seem out-of-the-ordinary, I did not anticipate a big move for the stock given that it was nestled against $36 resistance but buttressed by $34 support.  I wanted a low risk way to play that range ahead of earnings, and settled on the call calendar.  Depending on what Feb implied volatility does, I might take the trade off next week as my short Jan 35 call continues to decay.

Read here

TRADE: VIX (13.56) Bought the Feb 17 / 20 / 23 Call Butterfly for $0.27

Dan:  Spot VIX closed at 5 year lows this week, as the SPX closed at 5 year highs, while this relationship could continue for some time, my sense is that heading into Q4 earnings season, and the “honeymoon period” fading on the fiscal cliff deal, maybe just maybe we see vol pick up a tad.  We have looked at many ways to play for a short dated pop in vols, and few offer attractive risk reward.  There are no Puts to sell as market participants remain fairly adamant that the VIX won’t go much lower than current levels, yet outright Call purchases or Call Spreads are not cheap from a premium standpoint.  The ButterFly that I bought this week offers a 9 to 1 potential payout if the VIX were to close at its long term average of 20 on Feb expiration. Obviously I will need a fairly big move (break-even at 17.27), but if there is any reason for the markets to retest unchanged levels on the year, this will likely be a decent structure to own, with little risk.  Read here

Friday, Jan 11th:

TRADE:  MS ($20.20) Bought the Jan 20 put for $0.40

Dan:  MS had a fairly eventful news week last week with the announcement of 1600 layoffs, realization that capital requirements as directed by Basel III will be less onerous than originally thought, and hedge fund Third Point took a stake in the investment bank.  There seemed to be a good bit of good news in the stock trading at 18 month highs heading into this week that will see Q4 earnings results from BAC, JPM, C, GS & ultinately MS Friday morning.   With implied vol at very reasonable levels, and a whole week of bank earnings in front of MS, it seemed like the better risk reward trade to play for a near term pull back.   If the stock is weak in front of MS’s report Friday I will look to spread these Puts in an effort to reduce my break-even while also lowering my profit potential.   Read here