Trading Diary: Dec 30th – Jan 3rd

by Enis January 5, 2014 5:52 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 30th – Jan 3rd:    

Monday Dec 30th:

ACTION – Bought to Close the AAPL ($556) Jan3rd 550/540 put spread for 1.75 for a 2.25 gain

Dan: With AAPL failing on the upside at the prior highs, it was our sense that the stock’s recent bounce had run out of steam and that the risk/reward did not remain attractive to remain short the $550 strike put as the stock neared the strike.  Our entry was good last week, and the we captured a good big of decay of the spread so we thought prudent to take the profit and move on so that we did not have to deal with the potential of a $550 pin on Friday’s weekly expiration.

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The 10 Commandments of Risk Management by Ken Grant

An Annual RiskReversal Tradition to post this at year end.

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Tuesday Dec 31st:

Shortened half day.  We did detail a CotD post outlining the Internet leaders of 2013 to watch in the new year.  All four stocks were lower on the first 2 trading days of 2014.

Chart(s) of the Day – The 2013 Net Leaders, $GOOG, $AMZN, $PCLN, $NFLX

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Wednesday Jan 1st:

Happy New Year!

Thursday Jan 2nd:

TRADE: GLD ($118.20) Bought the Feb $120/$125 Call Spread for $1.47

Enis:  We first got interested in a potential base in precious metals about a month ago, when we outlined our long investment idea on GG.  Since then, gold and silver had declined a bit, but the technical picture looked even more encouraging as the metals held their summer lows while momentum was improving.  Finally, the strong reversal higher on December 31st, and the gap up on the first new trading day of 2014 confirmed to us the potential for a strong bounce in gold and silver over the next couple of months.  We view the 128-130 as major resistance, so would ideally get out of this position if GLD reaches the high 120’s.

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Action:  DVA ($64.67) Bought to close 1 Apr 52.5 put, Sold to close 1 Apr 60/65 Call Spread, collected $2.65 credit for a $2.50 gain

Enis:  We were first interested in DVA after Berkshire Hathaway continually increased its stake in 2013 despite a number of negative headlines for the company regarding Medicare reimbursement for dialysis overall.  After delving more deeply into the potential upside for the stock in the face of a declining overall industry pie, we came upon a stellar explanation of the potential reasoning behind Berkshire’s stake, courtesy of Brooklyn Investor’s blog.  Their low cost structure could actually lead to better overall profits in the long run even as the industry shrinks.  Once the technicals lined up, we entered the long trade in early December.  We exited on Thursday as DVA approached 1 year resistance, but we have this stock on our long watch list for another entry if the technicals set up well in the future.

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Friday Jan 3rd:

Name That Trade – This $RIG Could Roar if Oil Doesn’t Spill

Enis:  I outlined a potential pairs trade which would be long RIG calls, and short USO calls. We did not execute this trade ourselves on Friday because oil had been down for 4 straight days, but we like the overall thesis, and might pull the trigger on a better entry.  The underlying rationale is that RIG is a cheaply valued stock that should have value buyers interested in 2014 as long as oil prices do not see a 10%+ fall.  Oil was down 6% last week, so not an auspicious start, but the pairs trade would mitigate the risk of oil declining by selling the USO calls to finance the RIG calls.  If the rationale is correct, RIG should outperform oil on the upside, and the trade would profit as a result.

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Hypothetical Trade/Hedge:  EEM ($40.10) Buy Feb 40 Put for $1.15

Dan:  For those that are long and strong U.S. equities, the one immediate risk to the continuation of the rally could come from emerging markets such as China or Brazil.  With Implied Vol relatively low in EEM, Feb or March puts could be a very reasonable hedge for a portfolio of U.S. stocks.

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