Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was May 6th through May 10th:
Monday May 6th:
TRADE: Bought the BBRY ($15.72) June 22nd / July 14 Put Calendar for $.55
Dan: Despite a lot of very mixed reviews and conflicting reports of high returns for the company’s new phones, BBRY has hung in right in the middle of the range for 2013. My sense is that the early success or failure of the Z10 and the Q10 in North America will likely determine the course of the stock for the balance of the year as the company is not expected to release any additional phones. Investors are not likey to get a sense for unit numbers until BBRY reports in late June, which sets up nicely for calendars as the stock will continue to bang around in the ytd to range. I want to own July puts for the earnings event, and by selling June of the same strike I hope to finance earnings trade.
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Tuesday May 7th:
TRADE: JCP ($16.52) Bought the June 16 / 20 Call Spread for $1.34
Enis: JCP has been our radar ever since the stock’s corporate bonds started rallying a couple months ago. Corporate credit traders are usually ahead of stock traders in distressed stories like JCP, as they are closer to the cash flow and balance sheet statements to assess the long-term viability of the business. In that sense, credit traders have been anticipating the recent improvements (most importantly, the new financing deal announced at the start of May) for some time now. Our thought has been that the stock is depressed enough that it is likely to catch up to the credit on any incremental news. The announcement of Soros’ 8% stake last week was the first volley, and this week’s sales numbers, while weak, projected some optimism for the second half of the year, which was the second volley. Any more positive news, particularly with regards to the change in strategy (returning to discounts and sales), should be enough to move the stock back up to the 19-20 area, where we would want to exit this trade. In the meantime, we like both the fundamental and technical setup, though are a bit nervous about JCP’s earnings announcement in the coming week. However, once again, bad news is expected, so the bar is quite low in our view.
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Wednesday May 8th:
Trade: GMCR ($58.40) Sold the May10th (weekly) 52.50/50 – 65/67.50 Condor at 1.00
Dan: My sense was that a lot of the good news was in GMCR heading into their Q1 report, but also felt the current mood in the market, and the high short interest in the name should add some support on downside in the event of a miss. The implied move seemed fairly reasonable but my sense was a move in line with the 25% average move over the last 8 qtrs maybe a tad hard to come by. I made a defined risk trade to “fade” the move.
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Thursday May 9th:
Name That Trade – Soda
Enis: We’ve noticed a few stocks over the past few months that presented appealing breakouts (AMGN, DAL, TSLA), but we have not traded them as aggressively as we should have. Of course, it’s that sort of market environment, where patience on waiting for a good entry on the long side has not been rewarded. But we don’t want to throw our discipline by the wayside simply because of a fear of missing out, so we did not enter the SODA trade on Thursday even though we debated it. Once again, in hindsight, it would have been a good entry, as SODA exploded higher on Friday. We have no desire to get involved here. Yet, if the stock does ever pull back to our 54-55 area, we are even more willing to get long than before, given the strength that it has shown in the past week. We like the long-term fundamental story and valuation, and the stock now has a nice technical breakout as well.
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Friday May 10th:
TRADE: CAT ($88.50 ) Bought July 87.50/80 Put Spread for 2.15
Dan: U.S. multinationals face 2 massive headwinds in the current macro environment, a strengthening dollar and weak global growth, particularly in Europe and emerging markets like China and Brazil. CAT gets about 65% of its sales from overseas and is particularly levered to the growth (or lack there of) in EM. CAT’s recent rally of nearly 12% to resistance could make the stock vulnerable if the economic data in EM softens over the course of the spring/summer and the dollar continues to breach multi-month highs. While I am cognizant of the rotation into more cyclical sectors of the market, like industrials I don’t think CAT is a great short on an outright basis, but the options look reasonably cheap and any meaningfully lower earnings revisions could cause the stock to re-test long term support at $80.
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Action: Bought to close the BBY ($25.10) May18th 26 / 28 Call Spread for $0.20 for a $0.70 gain
Enis: This trade was a good example of why we sometimes prefer selling a call spread or a put spread to initiate a “fade” position (playing for the end of a big move), as opposed to buying a put spread or buying a call spread. BBY gradually moved lower after my May 1st entry of this short call spread position, but it since it was a gradual move, I would have not made much profit if I had bought a put spread. In contrast, my short call spread position slowly decayed from both time decay and the directional move, resulting in close to a max gain on Friday when the stock traded near $25. My guess going forward is that BBY is stuck in a 23 to 27 range until earnings, when its next business data points will be closely watched.
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EXPIRED:
Trade: GMCR May10th (weekly) 52.50/50 – 65/67.50 short Condor expired for a 1.50 loss.
Dan: GMCR opened at $67 the day after earnings and I thought for about a half a second that this trade was very much in the game as below $66 and above $51.50 was my sweat spot for the weekly condor. The animal spirits of the longs looking to squeeze shorts took over and this one was off to the races, quick above my high strike in the call spread. Once this happened and the Call Spread that I was short was worth the full value of the spread the only thing left to do was sit and wait, and hope for a pullback, which didn’t come.
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