Trading Diary: February 3rd – 7th

by Dan February 9, 2014 6:46 pm • Commentary

Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was Feb 3rd – Feb 7th:    

Monday Feb 3rd:

Action: Sell to Close half GOOG ($1137) Feb 1150 Puts at $31 for a $12 profit

Dan:  My entry on the bearish trade from the previous Friday turned out to be just a bit early, but Monday’s broad market weakness bailed me out and I decided to take some profits on the position after the previous trading day’s 4% gains were reversed in their entirety.

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Tuesday Feb 4th:

Trade:  XOM ($89.70) Buy Apr 85/ 92.50 Risk Reversal for even $

Dan:  It was our view that XOM was getting a bit oversold in the near term, and the $85 level has been a massive support level for the past 18 months.  That coupled with the elevated levels of implied volatility, made an attractive way to get long exposure selling the 85 strike call.  This risk reversal structure offers downside in the stock below $85 (on April expiration), while offering upside above $92.5, which is where most of the price action has taken place since the news of the Berkshire stake. The risk/reward asymmetry is also partly due to the skew in XOM options, where downside implied volatility is higher than upside implied volatility.

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Action: BRK/B ($108.76) Sold to close the Mar 110/100 Put Spread at $2.75 for a $1.45 gain

Enis:  We had initiated this trade when BRK/B broke its 200 day moving average for the first time in a year. The trade quickly went in our favor, and with the overall market quite oversold after Monday’s selling, we took the trade off for more than a double.

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Wednesday Feb 5th:

TRADE: Bought the WYNN ($210) March 207/185 put spread for 6.50

Dan: On a day that saw weaker than expected revenue data out of Macau casinos for the month of January, we thought it was a decent entry to start a bearish position in WYNN resorts.  At the time it was our thought that there was a fairly odd disconnect btwn the prevailing macro theme of weak growth in the emerging world, specifically China, and that of the prospects of companies like WYNN who rely a great deal on the Chinese consumer for their sales and almost all future growth.

I also stated in the trade post “With the stock obviously a tad resilient I am going to leg into this trade and start small, and look to add if the stock gets back up towards last weeks highs.”  Well the stock closed the week back at the highs and I will be adding to the position at some point this coming week.

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ACTION: Bought to close half the VIX ($20.20) Feb 14 Puts, sold to close half the Feb 16/20 Call Spreads at 1.90

Enis:  The VIX protection structure moved solidly in our favor at the start of the week after the S&P 500 had fallen more than 100 points from the January high.  Given that the payrolls report was on Friday, we wanted to at least lock in partial profits on this structure ahead of that event, after which we expected implied volatility to fall, especially with President’s Day later in February.  It’s also worth noting that the debt ceiling fight in Congress looks to be benign.  With earnings season ending, the macro calendar gets much less active as a result.

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Thursday Feb 6th:

Trade: NKE ($71.40) Buy March 72.50/ 77.50 call spread for 1.40

Enis:  Nike has been a major under-performer among large caps in the U.S. ever since mid-December.  The stock nearly touched its 200 day moving average earlier in the week.  The Winter Olympics and the World Cup are major marketing events for Nike, so we put on a bullish call spread with the thought that the technical setup and the news catalyst of the Olympics offered a decent risk/reward to play for a move back to the $75-$80 resistance area.Read here

Hypothetical Trade:  TWTR ($51.05) Buy Feb 28th 50/55/60 Call Butterfly for 1.10

Dan:  After TWTR’s worse than expected engagement and active user metrics on its first quarter reported as a public company, the stock got nailed closing down 24% on the dead lows.  While we were inclined to play for a bounce the next day, we held off  given the ferocity of the move, but we did lay out a trade that we might have used, If we had been so inclined.   The idea went something like this…..”assuming it holds $50, we would want to chose a defined risk structure that also benefits from decreasing implied vol, and in the money call butterfly.”

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TRADE:  CMG ($554) Bought Mar22nd 550/500 Put Spread for $12.25

Enis:  Chipotle rose more than 10% after its better-than-expected earnings report in late January.  However, a number of technical indicators suggest that sellers might be more aggressive than buyers over the next few weeks.  When the stock approached its all-time high from its post-earnings session, we decided to put on a bearish put spread structure to play for a move back to the important $500 psychological support level.

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Hypothetical Trade:  SODA ($38.15), Sell the Apr 30 put at $0.95, Buy the Apr 45 Call for $1.55, pay $0.60 debit for the risk reversal.

Enis:  KO’s investment in GMCR was originally perceived as a negative for the prospects of SODA, but investors quickly warmed to the fact that if established beverage providers are looking for outlets in the “in-home” market, SODA could be very much in play.  Given the high levels of implied volatility risk reversals looked attractive.  We did not trade this one because the stock bounced too quickly, but we would consider similar structures if in fact the stock was back in the lows $30s at some point soon.

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Friday Feb 7th:

Hypothetical Trade:  SPY ($179.50) Buy March 31st 175/165 Put Spread for 1.50

Dan:  The SPX’s 2% decline this past Monday left many investors they wishing that they had bought some portfolio protection when implied volatility was at reasonable levels.   The markets bounce off the lows, into into Friday’s closing high for the weak, caused a significant decline in the price of options, which could offer a decent entry on a continued follow through.  Friday’s positive market reaction to the disappointing January Jobs data was a bit surprising to say the least, but any follow through early this week could provide the opportunity to make cheap bearish bets in SPY puts and offer the opportunity to put dollar cheap portfolio protection on.  The trade we detailed Friday may not be the strikes we ultimately chose, depends on where the SPX is when we pull the trigger, but we also may chose to just buy a put outright and leg into a spread if vol is at a level that does not justify a spread.

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