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 June 2nd – June 6th:
Monday June 2nd:
Name That Trade – $PFE: If Your Acquisition Lasts More Than 4 Weeks, Seek Immediate Help
Enis: All in all, Pfizer’s unsuccessful attempt to buy AstraZeneca looks more like an act of desperation rather than a well-planned business decision. The stock has fallen more than 10% since the headlines first surfaced in late April, so we don’t want to pull the trigger on a bearish biased trade right here, but we wanted to lay out our broad thoughts in case of a bounce in PFE in the coming weeks.
Name That Trade – $C: Citi Healed?
Enis: C is our favorite story in the financials sector, as the stock has underperformed in 2014, but its earnings results over the past year have been quite encouraging. Management’s strategy of downsizing and focusing on long-term profitability seem to be paying dividends. With that in mind, and the stock near $45 support, we wanted to lay out our thoughts on a potential bullish options trade if Citigroup reached our entry level.
Tuesday June 3rd:
TRADE: CIEN ($18.73) Bought June/Oct 20 Call Calendar for $0.99
Enis: Ciena sold off hard between its March earnings release and its scheduled release last week. The underlying news for Ciena’s business had not been as negative as the stock seemed to reflect, and we liked the technical setup for a bounce as well. Finally, with front month options expensive ahead of the earnings event, I bought a call calendar to take advantage of a mildly bullish view for the report.
Wednesday June 4th:
Trade: QCOM ($79.75) Buy to Open July / Aug 82.50 call spread for .85
Dan: Despite the stock failing to make a new high last week with the broad market, playing for a breakout looks fairly attractive in and around the company’s fiscal Q3 earnings scheduled for July 23rd. Despite Implied Vol being cheap in the name, it makes senses to look to finance outright directional bets as a slow grind higher for call buyers can be expensive in a low vol environment. Options trading is obviously tricky, in exchange for defined risk through long premium trades, one must get direction, magnitude of the intended move and timing correct, which often times can make the odds of profitability challenged. Out of the money calendars, help with offsetting decay that occurs over time, and essentially buys the owner of the structure time.
Action: TLT ($111.56) Sold to Close June 112 / July 115 Put Spread at 2.93 for a 1.00 gain
Dan: In a week since initiating a bearish trade on bonds, the TLT declined 2.5%, failing at technical resistance at $115, and retracing almost to the stock’s 50 day moving average at $111. In front of what we thought had the potential to be market moving events in the ECB’s rate decision and the May’s Jobs data, we closed the profitable position as we thought there was a potential for a bounce from support.
Thursday June 5th:
Action: CIEN ($22.25) Sold to close the June/Oct 20 Call Calendar at $1.11 for a $0.11 gain
Enis: In retrospect, I wish I had chosen the 21 or 22 call calendars, which would have been much more profitable than the 20 call calendar since CIEN traded much higher than I expected when I initiated the trade. Of course, hindsight is always 20/20, and the main reason I chose the 20 strike was that it reduced my downside risk if CIEN sold off after the report. In any case, when CIEN held above the $22 resistance level after the earnings event, we decided to take a small gain on this position rather than risk a loss if CIEN kept rallying.
ACTION: Sold to close SINA ($44) June 50 calls at .25 for a .75 loss
Dan: When I originally looked at the setup into SINA’s Q1 results I preferred the setup for playing for a bounce to technical resistance as opposed to a continued breakdown from an already oversold position. Despite getting the initial move wrong, the stock’s post earnings volatility (two 10% moves in some many days) kept options prices bid, at one point making the trade a small winner. IN hindsight we should have exited the trade when we were back up on it as the initial thesis was wrong, but we got bailed out. With the stock making new lows toward the end of the week we decided to salvage what premium we could as time was running out and our strike looked increasingly out of the money.
Name That Trade – $LULU: If the Market Gives Your Lemons, Make Lemonade
Dan: LULU’s underperformance to its peers and the broad market is noteworthy. The poor sentiment towards the stock, coupled with its high short interest makes the setup into next week’s Q1 results particularly interesting when you consider the potential for a sharp rally on the slightest bit of good news. While we did not pull the trigger on a contrarian trade, we will most definitely take a closer look depending upon where the stock is immediately prior to the June 12th report.
Friday June 6th:
Name That Trade – $YHOO: Alibaba and Reading the Tea Leaves
Enis: YHOO has been rangebound for much of 2014 after a huge run in 2013. Alibaba’s IPO in the next few months could put YHOO stock back in the headlines given its large stake in the Chinese company. We laid out our thoughts ahead of that event, expecting continued rangebound price action given the various push/pull factors for the stock.
Trade: GE ($27.12) Bought to open the July 28 calls for .16
Dan: This was a fairly simple trade. The stock is cheap, well exposed to a potential reflation of global growth, has underperformed the broad market and its peers, the technical setup looks interesting and options on the stock in which to play are unusually cheap from a dollar and a vol basis.