Trading Diary: Oct 28th – Nov 1st

by Dan November 3, 2013 4:34 pm • Commentary

Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was Oct 28th – Nov 1st:

Monday Oct 28th:

TRADE: AAPL ($529) Sold Nov 16th 500/490– 565/575 Iron Condor at $4.00

Dan:  It was our sense that AAPL’s Sept pre-announcement of Q4 sales and Gross Margins was likely to take some of the suspense out of the earnings event that the options market was pricing for some serious movement.  Our fundamental judgement was that he stock’s 17% rally in the weeks leading up to earnings would cap any potential upside in the very near term while the recent interest by activist investors could put a near term floor on the stock.    Selling the move appeared to be the way to play with defined risk.

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Tuesday Oct 29th:

Name That Trade $SPY – Portfolio Protection
First Potential Hedge – SPY ($176.45) Buy the Dec31st 173 put for 2.50
Second Potential Hedge – SPY ($176.45) Buy the Dec31st 172/162 Put Spread for 1.54

Enis:  The outright put purchase is more short deltas, so for those that are looking for protection on an immediate pullback that could be tradeable, this is the structure. For those looking for more of a set it and forget it hedge, the put spread is a nice structure because it’s less premium outright and has a very realistic protection profile.  These are not trades that we are doing, and would not do them on their own if there was not a long portfolio or position that you wanted to protect.  These are trades where we would only risk what we were willing to lose, as the probability of an out-of-the-money put making money is still less than 50/50.  But it’s cheap protection in a very strong market, and a worthwhile consideration for those looking to sleep easier into the end of the year.

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Wednesday Oct 30th:

TRADE: XCO Bought Stock at $5.90

Dan:  I had a pretty good trade in this stock earlier in the year buying it near $6 and selling above $7.  With the stock making new 52 week lows on a combination of week results and with the weakness in natural gas, I wanted to take another shot on a company that I think has very solid management and a who’s whos list of large shareholders.

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TRADE: FB ($49.10) Bought Nov16th 45/50/55 Call Fly for $1.10

Enis:  FB had traced out a well-defined range between 45 and 55 in the 6 weeks leading up to the earnings event.  While we expected a fundamentally strong report, we also were of the opinion that expectations were much higher heading into this report vs. the Q2 earnings report.  On top of that, the reaction earlier in the week from other social media stocks like LNKD and YELP indicated to us that investor appetite for the sector was subdued.  As a result, we liked the idea of playing for rangebound price action following earnings, with a slight upward bias given what we viewed as very strong support in the 45-46 area.

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Thursday Oct 31st:

TRADE: PG ($81.30) Buy Dec 20th 82.5/77.5/72.5 Put Fly for $1.30

Enis:  PG made a minor new all-time high earlier in the week, only to see a significant reversal on Wednesday.  Given that reversal, and the fundamentally stretched valuation, we liked the idea of playing for a move back to the mid-point of the 9 month range in PG.  The put fly structure should decay nicely over the coming month if PG does in fact remain below $82.50.  This trade will take some time to make money, but since PG has not been a big mover for months now, we also view it as a better risk/reward trade than an outright put spread.

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Friday Nov 1st:

TRADE: CF ($215.60) Buy Dec 20th 220/210/200 Put Fly for $2.00

Enis:  CF reports earnings on Monday after the close.  We liked the stock’s prospects for a move higher in August, but the stock is up about 15% since then.  On Oct. 28th, the company announced the sale of its phosphates business to Mosaic, which was a clear positive.  The stock did rally up to $220 on the day of the announcement, but has retraced since then.  The stock’s inability to maintain that rally is a sign of short-term exhaustion on the part of buyers, and we like playing for a rangebound situation in the coming month as a result.

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TRADE: CBST Bought Stock for $61.84

CC and Enis:  This is our inaugural selection for our new Investments section.  These are longer-term positions that we like as secular themes and individual, micro aspects of the company.  As a result, the thesis is much more detailed than our normal trade ideas, and focused much more on the fundamentals.  In the case of CBST, we anticipate myriad opportunities to use options around our long-term stock position to enhance returns going forward.

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Action:  Sold to Close EBAY ($52.35) Nov15th 50/52.5/55 Call Fly at $1.05 for a $0.34 gain

Enis:  This was a position that gradually decayed over the past 2 weeks.  With another 2 weeks left until expiry, we decided to take our profits.  While we still expect the stock to remain in the 50 to 55 range, the risk/reward is less attractive given the structure’s appreciation, and the stock’s realized volatility has picked up in the past couple weeks.

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Trade:  AAPL ($518.50) Bought Dec 525 / 550 / 575 Call Butterfly for 4.00

Dan:  Since reporting results on Monday evening, the stock spent most of the week going sideways, but below the level it went into the earnings event.  With the recent refresh of iPhones and iPad with multiple iterations of each, AAPL products should be in great demand as we head into the holiday selling season.  My sense is that with the stock around $520 there is about $25 of near term downside vs maybe $25 to $30 of near term upside back towards the highs of the year.  While I am near term bullish, I think the risk/reward for long stock is about even, but the near the money call butterfly offers a far superior potential payout.

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