Here is a quick recap of all of the trades that we initiated, closed, managed, expired and considered (Name That Trades) in the week that was Mar 10th – Mar 14th:
Monday Mar 10th:
Name That Trade(s):
Hypothetical Trade: QQQ ($90.33) Buy May 90 Put for 2.22
Dan: Plain and simple, given that the top 5 holdings of the QQQ make up 34% of the weight, options on the index at the highs seem cheap on a vol basis given the potential for so few stocks to cause significant price swings for the etf. For those looking for near the money, defined risk bearish tech exposure, QQQ puts in May seem like a cheap way to express that view.
Tuesday Mar 11th:
TRADE: RIG ($42) Buy the Apr19th 41/45/49 call butterfly for $1.32
Enis: RIG has been beaten to a pulp over the last few months, down over 30% from its November high. Investors have fled the stock as drilling day rates have dropped and technical levels have been breached, and valuation has become quite depressed (0.85x book). We felt a bit more comfortable about a long biased position early in the week when RIG was showing some relative strength compared to the rest of the market, but the stock was down below $40 by the end of the week, leaving our call butterfly out of the money. We are also long the stock in our investment portfolio, with a closing stop of $38.20, which is only a couple percent away from Friday’s close. This trade has lost a lot of its value quite quickly, but with more than a month to expiry, we are likely to hang on at this point rather than pull the plug for so little premium.
Name That Trade(s):
Hypothetical Trade: XLE ($87.15 ) Buy the April 88/84/80 put fly for 1.00
Wednesday Mar 12th:
New Trade: GM ($35.10) Bought April 34/37/40 Call Butterfly for .90
Dan: The news flow in GM last week went from bad to worse, but the stock made an important hold at key technical support on Friday. We wanted to express the view that the stock would hold at support, and the stock’s more than 12% year to date declines reflect a good bit of the recent news. In the money call butterlies lessen risk of decreasing vol and set a stop at the support level that we identified that we would not want to be low below.
New Trade: XLE ($86.93 ) Bought the April 88/84/80 put fly for 1.01
Enis: XLE was unable to push above the $88-$89 resistance area over the last few weeks. When crude oil cracked on Tuesday, we laid out the XLE put fly idea in a Name That Trade post. On Wednesday, oil prices were sharply lower again, but XLE was close to unchanged, which is why we decided to pull the trigger on the put fly. We will look to take off the position if XLE gets down to the $84 midpoint of the structure in the next few weeks.
Thursday Mar 13th:
Trade: COST ($114.68) Buy the Apr4th 115 Put for $1.80
Enis: COST has had a string of sales and earnings disappointments over the last 6 months. Technically, the stock bounced back from its weak earnings result in late February, but failed around the 200 day moving average this week. That gave us comfort in a new short side entry in COST. We decided to simply buy an in-the-money put given the low level of implied volatility in COST, with a target of $110 on the downside, where we would take off the position. In the meantime, a move above $116 likely forces us to take the loss.
Action: Buy to close the Mar 110 Put for $0.05, Buy to open the June 120/115 1×2 Put Spread for $0.08, total cost of $0.13
New Position: Long the BRK/B June 120/115/110 Put Fly for $1.73 cost basis (original $1.60 cost plus additional cost of $0.13 for today)
Enis: Our BRK/B entry was one of our worst entries of the year, as the stock zoomed higher almost immediately after we initiated the position. With the probability of a profit on our structure significantly reduced, we decided to adjust the position to give ourselves a better shot at recouping our losses in the coming months. Adjusting the long June 110 put into a June 120/115/110 put butterfly gives us a profitability range of approximately 112-118 on June expiry. The benefit of adjusting the trade is that we have a higher probability structure now. However, the downside of the adjustment is if BRK/B heads back lower quickly, in which case we will have given up some of the upside of the original long June 110 put.
Action: JPM ($57.32) Sell to Close April 11th weekly 59 Puts at 2.55 for a 1.10 gain
Dan: With the stock down 3.5% in just a few days we thought we would take the quick profit. While we do not expect specific negative news as it relates to JPM from the Fed’s Stress Test results due over the next couple weeks, the lower the stock goes into the results the more likely it would bounce coming out of them.
Friday Mar 14th:
TRADE: RSX ($21.55) Bought April 22 calls for 1.00
Dan: This was a tough trade structure to arrive at for a few reasons. First implied vol, while not through the roof, is at 12 month highs, making long premium directional bets extremely hard to make money on with anything short of a massive move. We chose to play for a bounce in Russian equities, a sort of sell the rumor buy the news trade and decided that long calls outright made the most sense as we would look to close on a quick move higher.
ACTION – Sold to close VIX ( 17 ) March 14 – 15/19 call spread risk reversal at 1.75 for a 1.75 profit
Enis: We had been holding this position for quite a while with the expectation that the VIX would have one more spike before expiration given the busy geopolitical backdrop and the continued bad news out of China. On Thursday and Friday, the VIX moved into the high teens once again. With VIX expiry in the middle of this upcoming week, we decided to take our gain on Friday’s VIX strength rather than risk losing those gains on one sharp move lower in the VIX on Monday or Tuesday of the upcoming week.
TRADE: FB ($67.70) Bought April 65/60/55 Put Butterfly for .80
Dan: If the market catches its footing and makes a new high from here, then FB will continue to work until it’s next (and who knows when that will be) piece of bad fundamental news, either something on the earnings front or something from a competitive nature. In the near term with the market a tad jittery it is our sense that FB could be on portfolio manager’s list to raise cash in given its 24% year to date gains and the fact that last week saw a weakening in the many other momentum names like TSLA, PCLN, NFLX and WYNN. We are in the camp that if the S&P 500 sold off 5%, FB would likely sell off 10%. While we wouldn’t short the stock, we like the risk reward set up of the put butterfly.