Trading Diary Aug 5th – Aug 9th

by Enis August 11, 2013 7:42 pm • Commentary

Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was Aug 5th through Aug 9th:    

Tuesday Aug 6th:

TRADE:  Buy the CF (187.80) Sept 180/195/210 Call Fly For $4.08

Enis:  I used to trade the fertilizer stocks when I was at Merrill Lynch, back in the go-go days of the commodity boom in 2006-2008, when the stocks traded more like the TSLA and NFLX of today than as boring agricultural names.  Since then, the industry has gone through a bust and subsequent revitalization.  CF has especially benefitted, due to consolidation in the industry and better capital allocation.  So I was naturally interested when I saw Dan Loeb’s Third Point take a stake in the company.  While I see more limited upside than Third Point, I see limited downside for the stock as well, both on its valuation and Third Point’s involvement.  So I wanted to structure a trade that would play for a range over the next 6 weeks, given that implied volatility was high ahead of the earnings event (which was, as expected, a non-event).  I plan to hold this trade as long as CF remains between 180 and 210.

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Wednesday Aug 7th:

TRADE:  JCP ($12.68) Bought Aug 17th  / Aug 23rd $14 Call Spread for .45

Dan:  The situation with JCP appeared to turning into the perfect storm with the stock’s more than 20% decline in a week, the CDS on the company blowing out 300 bps too new 52 week highs and option traders eyeing mid to low single digits in the stock by Jan or Feb expiration.  My sense with the news flow and the market activity equally atrocious that the slightest bit of good news on the company’s Q2 earnings call scheduled for Aug 20th could cause a bit of short squeeze.  Implied vol got fairly jacked so the calendar structure helps me finance the purchase of the upside calls while also giving me the opportunity to further reduce my cost basis for the earnings trade by selling a higher strike call in the earnings week part of the trade creating a vertical spread once the weeklies have expired worthless.

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Name That Trade $TSLA:

Enis:  We wanted to offer some strategies for those who are long and looking for protection or for increased leverage, as well as some strategies for those who were interested in selling the high implied volatility priced into TSLA options.  We haven’t traded this name in months as it has become a wild momentum name, but the options activity has of course picked up as volatility has increased.

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Thursday Aug 8th:

Name That Trade $PCLN:

Enis:  Similar to TSLA, we offered a couple structures for those who are currently long the stock, depending on the view.  We also proposed our favorite structure in PCLN based on the implied earnings move of around 5% and the decent risk/reward for the Aug9th/Sept 975 call calendar given the historical moves in PCLN.

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Action:  Sold the BA (106.33) Aug9th 109/105 1×2 Put Spread at $2.33 for a $1.30 gain (Remain long the Aug9th 101 Put since it has no bid)

Enis:  In retrospect, waiting until the last day of expiry would have been much more profitable (a $2.64 gain as opposed to the $1.30 gain we booked).  But hindsight is of course 20/20.  We wanted to book the gain on Thursday the trade could have gone from more than a double to a flat position if BA had a big move higher on Friday (especially since it was already down 4 straight days as of Thursday).  In any case, the butterfly structure turned out to be the right one for fading BA’s strength on earnings, as the stock has sold off, but only marginally, so the butterfly worked better than if we had bought a put spread instead.

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Friday Aug 9th:

Action:  Sold the SODA (64.10) Aug16th 55/65 1×2 Call Spread at $7.04 for a $4.29 gain (Remain long the Aug16th 75 call since it has no bid)

Enis:  SODA is a name in which we have had success on the long side this year.  After its steep selloff in June and July from near $80 to $55 at its July 16th low, we decided to get involved for a creep back up to near the 50 day moving average around $65, especially since SODA’s earnings catalyst was still ahead of it.  As a result, we chose the butterfly structure to take advantage of high implied volatility ahead of the event.  With only a week left to expiry, we took the trade off for a nice gain on Friday.  This is one of those rare situations where everything goes to plan.

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TRADE: CAT ($83.90) Bought the Sept 85 / 77.5 Put Spread for $2.30

Enis:  While beaten-down materials stocks saw a bounce in the second half of last week, I view the move in many of those names as more of a dead cat bounce rather than a sustainable move.  Though many traders attribute it to better Chinese data, I think it’s more due to positioning, as funds sell some of their overweights and buy some of their underweights.  But the fundamental backdrop for materials names, and CAT in particular, is still quite unappealing.  CAT’s valuation is not at very depressed levels yet either, and the technical picture suggests a significant amount of supply overhead, so I bought the Sept put spread.

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Name That Trade $SPY Protection

Dan:  As the SPX appears to be sputtering a tad near the all important 1700 level, we thought it would be helpful to give readers a sense of how they could hedge through the end of the year a large cap tech portfolio that they want to hold onto despite the index’s nearly 20% gains on the year.  With calls by some high profile bears like Marc Faber that the market could crash some 20% from current levels by year end, I thought it made sense to outline a couple strategies that could protect gains in a couple different scenarios.  First, the put spread collar, offers near the money protection down to the June lows with no cost aside from getting short the SPY up 3%.  The second was a bit more of a disaster hedge selling the same strike call to buy the way way out of the money protection which would protect against a proper crash but not really offering to much protection until the index as down 10%.  Both strategies have there merits depending upon your prerogatives, but as CC suggested the straight up collar, selling the near the money call and buying the way out of the money put for no cost is like selling a fairly cheap option to buy the black swan event.  Not exactly something you want to do often, but if you think the market could be at an inflection point and you worry about the worst case scenario, this is one way to do it with just giving up some near term upside.  As a group we prefer the put spread collar.

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