Trading Diary: May 19th – May 23rd

by Dan May 26, 2014 7:35 pm • Commentary

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 May 19th – May 23rd: 

Monday May 19th:

Considering Our Options – QQQ: July 87 Puts

Dan: The rotation out of high growth, high valuation tech of the last few months which has benefitted slower growth, lower valuation large cap tech, remains in affect despite a fairly challenged end market demand for both groups.  We remain of the mindset that without a pick up in sales growth, large cap tech will eventually follow their smaller cap brethren.  Coming into the week we want to put our bearish position on notice as the July 87 puts were nearing our mental stop at 50% of the premium originally paid.

Read here

Considering Our Options – NFLX June Put Spread  

Dan:  A close above $350 was making us a bit nervous for our bearish trade and we were very likely to make a decision to look to take our losses or possibly roll into another structure that gave us better odds of breaking even after watching to trade go sour so quickly.

Read here

Tuesday May 20th:

Trade Update – NFLX: Buffering

ACTION- Buy to open the NFLX ($370.50) Jun21st 365/325 1×3 put spread, and buy the Jun21st 285 puts 2x, all for $5.30 debit

New position is the Jun21st 365/325/285 put butterfly for $15.20 (currently worth $7.30)

Enis/Dan:  This trade adjustment greatly improves our range of potential profitability (300.20 to 349.80 on June expiry, as opposed to below $315.10 with our old put spread position) given the recent rally in NFLX shares.  In exchange for that improved range, we have to spend an extra $5.30 in premium, and we also do end up giving up potential upside if NFLX shares trade significantly lower (below $310) over the next month.

We decided to adjust the position because the Jun21st 325 / 285 put spread has become a low probability structure that might not even make back much money given its decay if NFLX just grinds lower in the next few weeks.

Read here

Considering Our Options – CRM May 23rd 50 Puts

Dan:  heading into CRM’s Q1 results we previewed the qtr and quickly laid out our strategy for the remaining May weekly put position.  While we remain of the mindset that rallies should still be sold in stocks like CRM, heading into the print we stuck with the position that we had as we were essentially playing with the houses money after taking off half for a double a couple weeks earlier.  If was our sense that it would take a fairly impressive beat and raise to the stock moving much higher following the results, and while our position had a low probability of a high potential payout, we felt that we made our bet and were happy to stick to it.

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Trade: WYNN ($201.30) Bought to Open the June / July 190 Put Spread for 2.35

Dan:  On more than a couple occasions this year we have laid out out bearish thesis for WYNN that combines a mixture of inputs from macro, valuation, sentiment, relative attractiveness of long premium strategies, poor relative strength and most importantly the fairly horrible looking technical set up. While we are trying to identify these set ups in once loved cult stocks we are also trying to remain disciplined and not press shorts when they are oversold, and preferring to get short exposure on bounces back towards the downtrend line from the recent all time highs.  While 200 is a big support level, we wanted to set up a trade that would help finance owning downside puts for a potentially big breakdown.  This trade risks about 1% of the underlying stock price and serves to give us a little skin in the game.  On a failed rally to the downtrend at $210/215 we would possibly look to get more aggressive.

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Wednesday May 21st:

Name That Trade: Range Trade in Twitter, but not yet.

Dan: Price action in Twitter in and around the post IPO lock up lows is intriguing us a little and we have been evaluating different strategies in which we would possibly play for a test and hold of the all time low at $29.50.  In the money call flies look like a decent way to express a mildly bullish view with the stock just above $30, but we are stilling waiting for the test as the stock continues to show very poor relative strength to many social media stocks which have bounced off of the early May lows.

Read here

Thursday May 22nd:

TRADE: SINA ($47.62) Bought May 23rd/ June 50 call spread for 1.00

Dan:  The company had already pre-announced a negative Q1 earlier in the month, and with the stock so oversold we thought the potential for a bounce was decent if the company was able to offer the slightest bit of positive forward guidance.  The only think that really looked attractive was playing for a bounce back towards the recent breakdown level at $50, but given our stated low conviction idea we did not want to risk too much premium to do so.  Weekly/June calendars looked attractive.

Read here

Action: Sold to Close QQQ ($89.22) July 87 puts at 1.23 for a 1.17 loss

Dan:  Despite the ETF being up less than 2% from when we put on the bearish bet against the large cap Nasdaq index, the long premium trade lost almost 50% of its value.  We did not want to stay long and have the July puts continue to decay over the long holiday weekend as the potential for a continuation of the rally next week that has seen the SPX make a new high could render our trade nearly worthless, we will look for a better entry on a failed re-test of the previous highs.

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Action: EBAY ($51.45) Sold to Close the June21st 50/55/60 Call Butterfly at $1.60 for a $0.20 loss

Enis: We have tried to be patient with the EBAY call butterfly because the position does not expire until June 21st expiration. However, the company’s recent announcement that customer account information has been hacked has put the stock under pressure over the last 2 days. While the stock’s valuation is still a major positive, and probably a major reason why the stock continues to find support near $50, this sort of headline has the potential to act as an extended overhang as the public relations battle can be quite messy.

Our call fly that we put on prior to earnings is only a small loss even though EBAY is down nearly 5% from our initial entry price, so we are going to take the small loss and move on.

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Friday May 23rd:

TRADE UPDATE – Sold to close SBUX (72.00) Jun21st 70/65 Put Spread at .50 for a .90 loss

Dan:  SBUX has successfully held its recent lows and is now back above its 50 day moving average. This means the out-of-the-money bearish structure is at serious risk of becoming a total loss, especially with the long holiday weekend ahead adding an extra day of decay. We’re going to sell the put spread and look for a better re-entry on a failed breakout at the downtrend line from the earlier highs that has been in place for months.

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TRADE: TWTR ($30.65) Bought July/Sept 35 Call Spread for 1.25

Dan:  Earlier in the week we laid out an in the money call butterfly for playing for range bound price action if the stock successfully holds the previous all time lows at $29.50 following their lockup expiration in early May.  The idea of financing the purchase of longer dated calls by selling nearer dated ones is attractive for those who think the company will be able to demonstrate some user and engagement growth when they report their Q2 results in early to mid August.

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Name That Trade – Catching the Failing Whale

Potential Trade (Not Putting On NOW):

TWTR ($30.65), ideally do this when lower) Buy Sept 26/37 Risk Reversal for Even Money

Dan:  Risk Reversals look like a particularly interesting stock replacement for potential longs, especially targeting the $26 level for the put sale as it is really the only remaining technical support (the stock’s IPO price).  This structure offers a very wide range in which there is no pnl impact up or down, but adds significant leverage to the upside in the event of a sentiment shift among investors, while placing a 15% buffer to the downside before being put the stock.

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Note:  There is a natural survivorship bias in our expiring trades.  We take all of our winners off prior to expiry since we don’t take delivery of stock, which leaves only losing trades to report on expiry.  You can see all of our trades reported on the Recent Trades page.

 By Dan

Action:  CRM  ($49.50) Sold to Close May 23rd 50 Puts at 2.60 for a 1.30 profit, letting other half rideDan:  After having such quick success we thought it made sense to let the other half of this trade ride as we had an identifiable catalyst in the company’s Q1 results.  In hindsight we had an opportunity to book more gains after the stock closed at our strike the day after the earnings results, but it was our sense that such poor price action would result in lower lows.