MorningWord 11/14/13: In Trading, The Disappointment of Losers Always Outweighs the Satisfaction of Winners $CSCO, $CTXS

by Dan November 14, 2013 8:56 am • Commentary

MorningWord 11/14/13:  Longtime readers know that we take pride in our efforts to leg into directional options trades (some would say it is our special sauce), as was the case with CSCO over the last month.  An options trade that started out as Call Calendar ended up as a vertical spread with little risk and a decent gains.  We decided to exit the position prior to last night’s earnings as the existing structure’s gains did not warrant the risk into the potentially volatile event.  This trade was a good example of looking out to a catalyst without ever really having the intention of being there for the actual event.  So with the stock down 11% in the pre-market, I would suggest that it went as well as we could have hoped.

Before I break my arm trying to pat myself on the back for that trade’s success, I would be remiss not to mention what I would deem to be a trading disaster, even though I didn’t lose money on the trade it question, merely saw a nice profit pissed away.

A few weeks back I bought a Nov/Jan 62.50 Call Calendar in CTXS after the stock gapped down 15% to new 52 week lows on a negative earnings pre-announcement.  The idea was to play for a gap fill by buying longer dated out of the money calls, but finance the purchase of the Jan 62.50 calls by selling the Nov 62.50 Calls.  Well the stock did exactly what I had hoped for, started to fill in the gap, from $56.50 where I put the trade on last month, reaching its highest levels in a month of $61.64 yesterday  morning.  With 2 and half trading days left to Nov expiration and the stock a little less than $1 from the short strike in Nov, my short leg was decaying fast, while the Jan 62.50 calls had appreciated nicely.  The trade was worth more than double the $1 I had paid for the calendar. Now all I had to do was sit and wait for Nov to be nearly worthless and then spread the Jan calls and further reduce my risk.

And then BAM, this head line hits the tape (actually Twitter first) Amazon Web Services Announces Amazon AppStream and virtual desktop service called Workspaces, both products to directly compete with some of CTXS’s core product offerings.  The stock got nailed and was down 8% in what felt like a straight line.  The calendar call spread that had been playing out some beautifully was up in smoke, or at least the profit was.  Towards the end of the day I decided to close the position at what I had paid for it and just walk away as my biggest fear was letting the position turn into a loser.

While the news seemed to be a tad difficult to quantify, the knee-jerk reaction was violent, and the stock actually registered its largest volume day since 2010, even greater than the pre-announcement gap from last month.

What attracted to me to the story was the fact that the stock had just made new 52 week highs to new 52 week lows in a month, with a peak to trough move of 28% (MorningWord 10/10/13: From The 2013 Highs To Lows In A Quick – $CTXS), seemed like there had to be an opportunity to whip up some cute little options trade to play for a gap fill with defined risk.

CTXS 1yr chart from Bloomberg
CTXS 1yr chart from Bloomberg

While the one year chart above looked like a decent spot to step in towards the previous 52 week lows, yesterday’s violent reaction supported by massive volume may cause some technicians to look a bit longer term and not really like what they see.  The $60 support level of the last few years will most likely become very staunch resistance to the upside, with $50 very likely on the next piece of disappointing fundamental news.  The five year chart below shows the new danger zone.

CTXS 5yr chart from Bloomberg
CTXS 5yr chart from Bloomberg

The main take-away for me yesterday was just as good as I felt about how I managed the CSCO trade, I felt just as bad about how the CTXS trade went from a nice gain with additional future profit potential to nearly a loser.  But the other takeaway is that there are clearly haves and have nots in among technology stocks, which is likely one reason why so many investors are flocking to select group that continue to work as opposed to trying to pick the laggards.