Trading Diary: Dec 16th – Dec 20th

by Enis December 22, 2013 8:27 pm • Commentary

Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was Dec 16th – Dec 20th:    

Monday Dec 16th:

Action:  Sold to Close CF ($223.40) Dec20th 220/210/200 Put Fly at $1.20 For a $0.80 Loss

Enis:  This was a broken trade after CF stock gapped higher through our expected 220 to 221 resistance a couple weeks ago on news that CF management was considering a larger than expected return of capital program for the next two years.  That has been what Daniel Loeb and Third Point have been pushing for since their investment earlier in 2013.  CF pulled back to near our long strike of 220 earlier in the week, so we took that opportunity to sell our put fly for a limited loss rather than risk losing all of the premium of the trade by the end of the week.

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TRADE – Z (77.00) Bought the Jan10th 79/71/63 put Fly for $2.21

Enis:  Zillow is a high flier that has respected important technical support and resistance levels on multiple occasions over the past couple months.  With little fundamental backing in terms of appropriate valuation, Zillow is a stock that we expect to behave much more in line with technicals and psychology than stock-specific news, outside of earnings announcements.  In that context, we liked the technical setup in Zillow to play for a move back to the 200 day moving average and the prior bounce point for the stock in the 70-72 area.

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Tuesday Dec 17th:

ACTION – Sold to close the remaining 3/4 of the VIX (16.25) 15/18 call spread at .95, for a total 1.00 profit on the structure.

CC:  The VIX structure was set to expire Wednesday morning on the opening bell, before the FOMC decision was to be released.  As a result, the trade had benefitted from a favorable move higher in the VIX ahead of the event, which was the original thesis at initiation in November.  That’s why we took our gain on Tuesday, rather than deal with a coin flip for Wednesday morning.  We will continue to closely monitor the event calendar going forward to take advantage of events on or near VIX expiry.

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Wednesday Dec 18th:

ACTION: WMT ($77.18) Sell to Close Jan14 82.5/77.5/72.5 Put Fly at 2.80 for a $1.05 gain

Dan:  WMT had shown very good relative strength in the face of disappointing fundamental news hovering near the 52 week highs, a set up that made very little sense to us.  Since initiating the bearish position the stock declined about 5%, breaking near term technical support at the 50 day moving average and quickly approaching the 200 day moving average, a level that it should have found some buying interest.  With a healthy short term gain I decided to take the profit prior to the FOMC announcement which had the potential to be a binary event.

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ACTION – Sold to close the PG ($81.05) Dec 20th 82.5/77.5 1×2 Put Spread at $1.40 for a $0.10 gain

Enis:  PG was another former broken trade that turned into a winner early in the week, prior to the FOMC release.  We decided to take a small gain on this trade rather than ride the structure through the event risk, especially since expiry on Friday meant that the trade had the possibility of ending up worthless in just a couple days.  We also view 80 support as a formidable level to watch in the near-term.

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TRADE: DDD ($81.75) Bought Jan18th expiry 80/70/60 Put Butterfly for 2.20

Dan and Enis:  DDD is a stock where we think the fundamentals don’t justify the price action that the stock has experienced over the past couple years.  However, as with all options trades, timing is paramount.  We viewed Wednesday’s broad market pop as a potential opportunity to play for a correction in DDD stock over the next month given a retest of the stock’s prior highs in 2013 on a lower RSI reading.  The stock has since moved higher, but we are still in the trade because of the extremely high volatility nature of DDD’s moves, which makes a move below 78 over the next month a higher than normal (though now lower) probability.

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Thursday Dec 19th:

TRADE: Sold the VIX (13.33) Feb 14 Put to Buy the Feb 16/20 Call Spread for Even Money

Enis:  We have structured our VIX portfolio protection trades over the past 6 months with two main criteria in mind:  1)  what does the event calendar look like; 2)  does the structure offer asymmetric risk/reward.  With the VIX moving towards 13 on Thursday, we liked the entry for a VIX structure targeting potential volatility around the next Fed meeting as well as the debt ceiling debate that is likely to take place in late January and early February.

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Action: TSLA ($140) Sold to Close Dec 27th 150 Puts at $11.00 for a $5.50 gain

Dan:  From the highs earlier in the week the stock declined almost 10% approaching near term support. With the stock bucking the trend of broad market strength it made sense to close half of the position for a double, taking my initial capital off of the table, but letting some ride in the event the stock broke support which would likely yield a quick 5% decline.  With expiration quickly approaching I will likely close the position prior to Christmas as the options will start to quickly erode without any additional movement.

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ACTION – XLF ($21.61) Close Jan 21/22 risk reversal for even, leave long 1 Jan 22 call from original trade at zero cost

Dan:  With XLF apparently range bound between $21 and $22, and the potential for a breakout, without a catalyst prior to year end it made sense to close the short put and dramatically reduce the risk of the position.  Now for both positions initially described in the post from last month we are just left long the Jan 22 calls.

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Friday Dec 20th:

TRADE: Bought the F ($15.45) Feb 15/17/19 Call Butterfly for $0.58

Dan:  The stock has been out of favor since rumors of CEO Mulally being a top candidate for the top job at MSFT.  This past week’s reset lower of 2014 earnings obviously didn’t help, causing the stocks worst one day drop in 2 years. The stock could be oversold heading into the new year and sets up for the potential for a new year bounce candidate.  We chose and in the money fly because the risk / reward for playing for a move back to resent technical resistance made this a fairly cheap bet in our eyes, the way we see it we are risking 1 to maybe make 2, with high probability of the worst case being a small loss.

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ACTION – Roll the CBST ($66.50) short Dec 65 call out to the Jan 65 call (buy to close Dec 65 call, sell to open Jan 65 call), collect an incremental $1.75.

Enis and CC:  CBST has been a decent winner since we added it to the investment portfolio on November 1st.  We also had some success collecting incremental yield in December by overwriting the stock with a short call position.  With no major events expected in CBST over the next month, we decided to roll our short call position to January and collect an incremental 2.75% yield over the next month, at the risk that the stock gets called away above $65.  We don’t mind that given our cost basis now in the mid-50’s.

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ACTION: GM ($40.80) Buy to Close 1 Dec 40 call for .85
ACTION: GM ($40.80) Sell to Open 1 March 45 Call at .85
NEW POSITION: GM ($40.80) Long March 40/45 Call Spread for 1.60 (original price of the calendar)

Dan and CC:  Despite the stock overshooting our short leg of the call calendar in the very near term, the set up owning the longer dated calls continues to look attractive as we suspect investors pile into the stock as 2014 could bring the potential for share buybacks and there-initiation of a dividend.  We took the opportunity to roll Dec to create an in the money vertical call spread.

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Action:  HPQ ($27.97) Sold to close Dec20th 28 put at $0.08 for a $1.02 loss

Enis:  This was a trade that we would have better off taking off for a gain earlier in the week.  While we took off a number of trades early in the week since we did not want to risk riding the position through the FOMC event on Wednesday, HPQ was the one position that we held on to since we liked the stock specific setup.  In retrospect, we would have been better off taking this trade off before the event as well, especially with only a couple of days left until expiry.  If the event is a coin flip and the risk and reward are relatively equal, we’d rather protect our premium than risk it on a toss up situation.  It’s a lesson we’ll keep in mind for the future.

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TRADE: AAPL ($550) Sold Jan 3rd Weekly Expiration 550/540 Put Spread at 4.00

Dan:  The stock under performed this week as it became apparent that the iPhone was not being offered in China Mobile’s official roll-out of 4g service as was rumored over the last couple weeks causing the stock to make new 52 week highs earlier in the month.  The stock was nearly pinned to $550 on Friday and my sense is that the company should once again be one of the primary retail beneficiaries of strong holiday sales, which could help sentiment into year end.  The sale of the at the money put spread is a bit of a binary bet, but the risk reward is fairly attractive in the event that the stock continues to hover near $550.

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Note:  There is a natural survivorship bias in our expiring trades.  We take all of our winners off prior to expiry since we don’t take delivery of stock, which leaves only losing trades to report on expiry.  You can see all of our trades reported on the Recent Trades page.

3:17 PM EDT – NOVEMBER 18, 2013 BY DAN

New Position: Long HD ($79.75) Dec 75 / 72.50 Put Spread for .90

(Loss of $0.90 for a $1.20 initial cost base)