Trading Diary: Jan 21st – Jan 24th

by Dan January 26, 2014 8:32 pm • Commentary

Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was Jan 21st – Jan 24th:    

Tuesday Jan 21st:

Action:  Sold to Close NKE ($73.70) Feb 77.50 / 72.50 Put Spread at $3.15 for a 1.65 profit.

Dan:  In less than 2 weeks since initiating the bearish put spread in NKE, the shares sold off almost 5% , placing the stock very near the short strike of the spread.  With a month to expiration, and the position a quick double it was our sense to take the profit as investors could start to look to February’s start of the winter Olympics as a catalyst for the stock.

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TRADE: Bought the IBM ($187.85) Feb22nd 195/185/175 Put Butterfly for $3.00

Enis:  IBM had been on our radar since it first approached its declining 200 day moving average early in 2014 ahead of its earnings event later in the month.  On the day of the event, we finally decided to pull the trigger on a range play for earnings that was a bit bearish biased given our fundamental thesis on IBM and the poor technical position for the stock as well.  We chose 185 as the midpoint of the structure because that was near the midpoint of the 3 month range.

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Wednesday Jan 22nd:

No trades on Wednesday.  We looked at the outperformance of utilities this week, which is closely related to the fall in rates to start 2014:  

Chart of the Day – Most Important Price in the World

Thursday Jan 23rd:

Action: CMG ($508.70) Sell to open March 450/400 2×1 Put Spread at 12.25
New Position: CMG Long March 500/450/400 Put Fly for 3.25

Dan:  With CMG quickly approaching my long put strike, I wanted to take the opportunity to use the increasing implied volatility in the stock to lower my break-even on the bearish position in front of this coming week’s earnings event. Keeping a close eye on the technical set up, I wanted to turn the position into a ratio spread, without the worry of being naked short options, so I decided on turning the long put into a put fly, with $450 being the “guts” of the spread, also a massive technical support level.  What I like about this position is that I now have a fairly binary trade on, meaning if the stock goes higher after its earnings on Thursday,  I likely lose all of my premium, but I have whittled down the cost of the trade first with the calendar, and now with the butterfly and I am risking $3.25 if I am wrong, but could make up to $47 if I am right, Ill take those odds on an at the money spread any day of the week.

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Action: EBAY ($54.57) Sold to close Jan 24th / April 55 Call Spread at 2.00 for a .65 gain

Dan:  When I first saw the headlines of Carl Icahn’s involvement in the stock I had two very conflicting emotions, first nice to get a thesis correct every once in a while, by second super pissed that the stock was up 10% in the news as I for the time being had the wrong trade on to take advantage of the 10% pop in the after hours.  Well low and behold, the stock was sold on the news (more likely the poor results and guidance)  and came right back to the strike of my calendar.  With the broad market a tad jittery, and investors discounting Icahn’s near term impact in the shares, I decided to close the position for a gain and let the stock settle out before I decided on how best to play going forward.

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TRADE: Bought RIG for $45.15

Enis:  We had our eye on this deepwater driller after our Deep Dive post in early December.  With the stock trading at book value, we like the asymmetric risk/reward in buying the stock near its 1 year low.  One other potential benefit is further rumblings from Carl Icahn, who owns about a $1 billion slug of RIG stock.  The main risk is a steep fall in crude oil prices below the 80-85 area, which would take a number of projects offline.

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Action: Sold to Close GLW at $18.95 for a $2.48 gain or 15%

Enis:  We decided to take our gains on this name after riding it higher for a nice gain over the last couple months.  The stock is quite overbought, and expectations are elevated ahead of the earnings report in early February.  Rather than sit through that event, we preferred to sell the stock and see the reaction after earnings.

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TRADE: EBAY ($54.45) Bought March 55/60/65 Call Butterfly for .95

Dan:  After giving the stock a little air to breath after what was a pretty volatile 24 hours we decided that to play for a bullish move back to the previous highs around $60, a level that could serve as considerable resistance for the time being, a call butterfly targeting $60 as the guts of the trade offered a fairly decent risk reward.  We chose March as it is our sense that you could see other activists and/or funds attempt to ride Icahn’s coattails in the coming weeks which could help buoy the stock in a week broad market or cause the stock to grind higher in flat to green market.  Either way we think the mid $50s is a good entry for the stock given Icahn’s recent success in getting management’s to see things his way!  Also with AAPL’s upcoming shareholder meeting in late February, if the company were to preemptively agree to larger share buyback, but not what Icahn has proposed, this would likely be extrapolated as positive for EBAY shares.

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Friday Jan 24th:

Action: Sold to close the IBM ($181.75) Feb22nd 195/185/175 Put Butterfly at $4.30 for a $1.30 gain

Enis:  This rangebound structure worked well for the earnings event.  However, with expiry more than 3 weeks away, the structure was going to take a long time to decay for further profits.  As a result, taking the quick profits was more appealing, especially after the stock was unable to hold above its 50 day moving average around $182 on Friday.

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TRADE: AAPL ($550) Bought Jan 31st (next week expiration) / March 575 Call calendar for 8.00

Dan:  The options market is implying about a 5% one day move after AAPL’s fiscal Q1 report Monday after the close.  We thought targeting that level in an effort to take advantage of the elevated levels of implied volatility to help finance the purchase of longer dated calls made sense given the fact that we do not see a huge move for the shares.   We think it is very likely that the company puts up a decent quarter and offers in-line to possibly better than expected guidance given the current quarters launch of the iPhone at China Mobile, but we think it would be fairly unlikely to see the shares up 7-10%. Why?  Despite the stock’s underperformance, it is still the largest market cap stock in the world, and we suspect that for the stock to establish a new range above $600 it will need the benefit of excitement of a new product category, and/or some sort of push on the activist front as it relates to increased share repurchase and dividend.

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Name That Trade:  Hypothetical Trade: GOOG ($1133) Buy Feb 1100 / 1000 / 900 Put Butterfly for 15.00

Dan:  It is my view that GOOG maybe the most crowded long in the entire U.S. equity market, reminiscent of AAPL in 2012. While I don’t love the idea of pressing the stock on the short side after 2 consecutive down days in the market,  I wanted to have the thesis out there if the stock were to bounce prior to their Q4 results this week, as a defined risk bearish bet targeting $1000 on the downside looks like an attractive play for a contrarian standpoint.  The stock in my view could be priced for perfection, and the slightest mishap in the earnings report could have shares down sharply leaving investors with big gains shooting first and asking questions later!  If I were long this stock I would be very inclined to look for ways to protect gains into what could be a volatile period for the market as a whole and specifically a volatile response to less than stellar results.

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