Trading Diary: June 23rd – June 27th

by Enis June 29, 2014 8:00 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 June 23rd – June 27th:

Monday June 23rd:

TRADE:  SPLS ($11.23) Bought Jan15 12 Call for $0.59

Enis:  Staples is one of the beat-up, left-for-dead retailer stories that has popped up with increasing frequency as the Internet slowly chips away at the brick-and-mortar model.  However, SPLS is in much better financial shape than the majority of such distressed situations, with positive free cash flow, a limited and manageable debt load, and the ability to continue financing new investments in its business at the same time.  Those new investments have been primarily aimed at continuing the growth of its own website and its integration with the physical retail locations.  While those investments have yet to yield substantial results, the diversity of Staples’ business is in contrast to many other struggling retailers.  Finally, cheap options prices made an upside call position an attractive, defined risk way to participate in SPLS appreciation over the next 6 months, while risking much less than by simply buying the stock.

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Name That Trade – $MU:  Three Ways to Play

Enis:  This post discussed several different possible structures in MU ahead of the earnings event.  MU ended the week essentially unchanged after the results, which were stronger than expected on paper, but the stock’s rise since mid-April indicated the raised expectations among market participants.  In any case, MU has still risen almost 50% year-to-date, one of the best performing chip stocks in a hot sector to start.

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Name That Trade – $FXI:  China Syndrome

Dan:  On the back of strong manufacturing data in China we wanted to take a quick look at divergent price action in local A Shares in China that foreigners can’t invest in, and those to the H Shares listed in Hong Kong which they can. The outperformance of the H Shares is pretty staggering over the last few years, but coupled with this past week’s rejected breakout in the FXI (think H Shares) while the Shanghai Composite flirts with multi year lows, it is our sense that the FXI could play a little catch up on the downside in the next few months.  While we were not ready to pull the trigger on a bearish trade just yet, we would be inclined to do so on the next failure at the prior highs.

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Tuesday June 24th:

Action:  IBB ($257.10) Sold to close the Jul19th 245/230/215 Put Butterfly at $1.05 for a $1.69 loss

Enis:  Our entry on this biotech trade was structured around the $255 resistance area on a technical basis, as well as the inability of many of the sector leaders (like GILD) to make much progress in June despite favorable news.  However, when IBB breached that resistance level this week, we took our loss and exited the put fly, especially since the trade has much lower odds now that IBB is more than 5% away from the long strike of the butterfly.

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Name That Trade – $CBS:  Two and a Half Verdicts

Enis:  CBS implied volatility was at a 2 year high early in the week in anticipation of the Supreme Court’s verdict on the Aereo case.  We laid out a slightly bullish call butterfly trade that took advantage of the elevated options pricing and played for a move higher of 5% after the verdict was announced (in anticipation of a verdict against Aereo).  We actually bid for the structure out in the market for several hours, but were never filled.  The verdict came out on Wednesday against Aereo, and CBS rose to near the $62.50 short strike that we laid out in the post.  The call butterfly rose to around $2.30 by the end of the week (we bid $1.35, and offer was around $1.50).

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Name That Trade – $BBBY:  Blood Bath and Beyond?

Dan:  Heading into the company’s fiscal Q1 earnings report we took a look at the set up and came away with the observation that despite the stock’s 25% declines from the all time highs in early January, the stock felt vulnerable to a breakdown similar to what we saw in WFM and LULU after recent disappointments.  Despite vol being high, near the money July put spreads looked liked the way to play for a move back to $55 on the slightest bit of bad news.

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Wednesday June 25th:

Action:  Sell to Close ABBV ($54.50) August 52.5/60 Call Spread at $2.55 for a $2.20 gain

Enis:  ABBV had tested the $55 resistance level on several occasions since January, and had been rejected each time.  We decided to sell the call spread in the investment portfolio since August expiry was now less than 2 months away.  Of course, right after we sell the spread, ABBV finally broke out above $55 this week.  In any case, we still like the long-term bull case for ABBV.

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Action: Sold to Close QCOM ($78.14)  July / Aug 82.50 call spread at .58 for a .27 loss

Dan:  With QCOM down nearly 6% away from the strikes in my mildly bullish trade, and almost 7% away from break-even, I closed the calendar call spread for a loss as it had a low probability of success given the stock’s recent weakness.  I did not want this trade to turn into a sort of lotto ticket into the earnings event in the last week of July so I decided to cut my losses.

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Thursday June 26th:

ACTION: Sell to Open EBAY ($49.35) July 3rd Weekly 50 call at .29
New Position: Long EBAY ($49.35) July 3rd weekly/ July regular 50 Call Calendar for .78

Dan:  With EBAY up a couple percent since buying July 50 calls we decided heading into the holiday shortened week that we would look to off set some decay in what could be a quiet week by selling a 5 day option of the same strike.   We will look to possibly turn into a vertical as we get closer to the July 16th earnings event.

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TRADE – Sell the VIX (11.96) Sept 13 put and buy the Sept 15/19 call spread for a 0.10 debit

Enis:  While we had a loser on our last long VIX structure from June expiration, we still like the odds of a long VIX trade given the historical success that we have had with selling a put and buying a call spread in the VIX.  We chose September expiration since it’s the first expiration that will follow the expected summer doldrums, though any VIX spike between now and then will be an opportunity for us to exit this trade for a profit.

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Friday June 27th:

Action:  P ($29.20) Sold to Close Half of my Sept 28/35 call spread at 2.50 for a 1.55 gain

Dan: With Pandora up nearly 3o% since entering this trade back in early May, and the trade being worth about 2.5x what I paid for it I thought it was prudent as the stock neared the massive technical breakdown level of $30 from early April to take some money off of the table.

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TRADE: BAC ($15.36) Buy July 11th weekly /Aug 15 Put Spread for .24

Dan:  We are of the mindset that Q1 earnings for many of the money-center banks might have been as good as it gets given the low leverage ratios, poor trading volumes, uncertain rate environment, sluggish lending, heightened regulatory scrutiny and expectations that still look high for the sector. BAC is the one to watch, and we wanted to isolate the mid July earnings event, but look to finance the purchase of puts by selling shorter dated ones.

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Name That Trade – $MCD:  Chart’s Double Arch Elicits Grimace

Enis:  McDonald’s has struggled to grow its business for 2 years now, and the stock has stalled in that period as well.  While MCD’s fundamental situation has not improved much in the past 6 months, the broad strength in the overall market led to a brief new all-time high in MCD in May.  The stock has stalled near those highs, but has not rallied with the broader market in June.  Many macro factors seem stacked against McDonald’s, so I expect the stock to continue to struggle in the second half of 2014.

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Name That Trade – $AAPL:  Earnings Leverage

Enis:  We laid out a 1×2 call spread position that was executed on Thursday in preparation for AAPL earnings in late July.  The structure makes a ton of sense for those who are already long the stock, and is an intriguing speculative position in its own right as well.  AAPL has pulled back a bit in the last couple of weeks but remains up 14% year-to-date.

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