Trading Diary: Jan 27th – Jan 31st

by Enis February 2, 2014 2:26 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 27th – Jan 31st:    

Monday Jan 27th:

Trade: CAT ($91.80) Bought March 90 put for 1.70

Enis:  We’ve had a negative fundamental view on CAT for a couple years now, but did not want to put on a position in the stock ahead of its earnings announcement.  With its strong bounce on Monday on what we view as a tepid report (buoyed by its stock buyback and accounting adjustments), we took the opportunity to fade the strength by buying an outright put.  In my view, implied volatility has also gotten too low, especially considering the swirling rumors about continued stress in China’s financial system.  Considering that China is the main driver of industrial production in the emerging world, continued economic difficulty there will certainly threaten CAT’s profits in 2014.

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Action: HD ($78.60) Sold Feb22nd 80 Put at 2.09 for a $1.00 gain

Enis:  In retrospect, it would have paid to be more patient in HD.  But after a string of down days, and with the market finding some footing midday on Monday, we decided to exit this put for nearly a double.  We were hoping for a bounce to fade any strength back near $80, but HD broke its 200 day moving average later in the week.  A push back up to the $80 level seems unlikely at this point, especially considering the continued weak housing data that we received this week (pending home sales had their biggest drop since 2010, though maybe because of the weather).  In any case, we’ll keep our eye on housing-related stocks as an area of continued weakness in 2014.

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ACTION – Sold to open the XHB ($30.80) March 30 put at .70
New position – long the XHB March 32/30 put spread for .35

Dan:  Using technicals as a guide, we thought that the XHB’s bounce and hold of it’s 200 day moving average was a pretty good spot to lower our break-eve on the puts the March 32 Puts that we were long by turning into a vertical spread.  Now we own a $2 wide in the money put spread for .35 for the next 2 months.

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Tuesday Jan 28th:

Trade: BRK.B ($112.03) Bought March 110/100 put spread for $1.30

Enis:  BRK/B broke its 200 day moving average for the first time in more than a year this month.  The stock is a favorite among value investors and disciples of Warren Buffett, but in our view, that’s also a reason why the stock is more expensive than other conglomerates and a crowded long as well.  The break of the 200 day ma is a notable technical trigger that caught our attention, and we’re playing for further downside in the next 6 weeks as a result.

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ACTION- Buy to open the AAPL ($508) March 525/550 1×2 call spread for $1.00
New position is the March 525/550/575 call fly for $9.00 (currently $3.10)

Dan:  With AAPL down a bit more than we had expected, the call strike that we owned as a result of our call calendar heading into Monday’s print had a very low probability of being in the money on March expiration without some truly momentous news.  We decided to adjust strikes and lower our breakeven despite committing more premium to our original trade.  The point is we felt that if we were just to stay long the arch 575 calls we would have a very low probability of recouping our lost premium, but by turning into a call butterfly we lowered our break-even by almost 10%.

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Wednesday Jan 29th:

TRADE:  FDX ($132.16) Bought March 130/120/110 Put Fly for 1.95

Enis:  FDX broke its 50 day average convincingly for the first time since May, and the stock has found support right around its rising 100 day moving average, in the 130-131 area.  Given many signs of weakening global growth, and what we view as an optimistic valuation, particularly given the troubles for FDX in the past couple years, we chose to buy a put fly in March to play for an eventual break of the 130 support.  If that occurs, we could see another quick repricing in the shares, though we don’t expect 120 to be broken since it is longer-term support.

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Thursday Jan 30th

Action: Sold to Close CMG ($496)  March 500/450/400 Put Fly at $11 for a 7.75 gain

Dan:  This was a tough call given the relative weakness of the stock and the very poor performance by other fast serve restaurant stocks like MCD & YUM so far in 2014.  After trading this name pretty well, first with a put calendar, then legging into a vertical put spread we decided to take the profit off of the table heading into what was certain to be a volatile earnings event.  The tough call is that the trade was not meant to be focussed on the Q4 earnings event and this is a stock that we just don’t get, and want to be short it on spikes  I guess the takeaway is to be careful on the short side when the stock is oversold as it was last week, down almost 10% from the recent all time highs.

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Friday Jan 31st:

TRADE: GOOG ($1162) Bought Feb 1150 Put for 19.00

Dan:  After laying out the thesis the prior week that despite GOOG’s strong execution in the prior periods, the stock’s performance and valuation adequately reflect said execution.  We think GOOG is VERY crowded long and while bulls continue to see no end in site for the stock’s torrid run, up almost 40% since early October, it is our sense that you do not want to be long a stock like this when a few large investors head for the door at the same time (see BA last week).  My entry obviously sucked and will look to possibly adjust or spread on near term weakness.

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Hypothetical Trade: TWTR ($65) Sell the March 55 Put to Buy March 65/75 Call Spread for .50

Dan:  This structure offers superior risk reward characteristics for those inclined to be long into next week’s Q4 print, especially for those who see the upside / downside scenario fairly evenly matched at about 15% in either direction (essentially the implied move).  We are not executing this trade, but have gotten a bunch of questions from those who see a similar move to FB after it’s Q4 results last week, and gun to our heads we would prefer this structure as opposed to long stock as it takes advantage of the very high level of implied volatility, which should come in hard after the print.  The trade off for given yourself room on the downside is capping your gains at $75.

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