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 30th – July 3rd:
Monday June 30th:
New Trade: CSCO ($24.87) Bought Sept 25/27 Call Spread for .56
Dan: CSCO has been a huge laggard to many of its large cap tech peers like INTC and MSFT that have similar growth projections yet trade at nearly a market multiple of about 14x next years expected earnings, while CSCO trades at 11.5x. INTC and MSFT have recently made new 14 year highs, while CSCO sits well below its 2007 high, let alone the 2000. The stock has been basing just below $25 since reporting a better than expected fiscal Q3 back in mid May, and it is my sense that the stock could re-test the prior 52 week highs (around $26.50) heading into the fiscal Q4 print and have a meaningful breakout on the slightest bit of good news post the results. I wanted to look for a defined risk way to play for such a breakout that offers a favorable risk reward and captures the earnings event.
Name That Trade – $SLB: Schlumber Party
Hypothetical Trade: Buy the SLB ($117.40) Jul19th / Aug16th 115/120 Strangle Swap for $2.00
Enis: SLB broke out to a new all-time high last week above $115 on big volume. The stock’s breakout is especially significant given the fact that the prior high was nearly 7 years ago. SLB implied volatility has moved higher over the past week as a result of the breakout as well as the approaching earnings date. Given the long-term significance of the $115 level, we like the idea of a strangle swap that plays for a continued breakout or a breakdown after July expiration. We don’t expect much of a move on the earnings event given that the analyst discussions last week revealed a good bit of guidance for investors. We might execute this trade closer to the earnings event.
Tuesday July 1st:
New Trade: PCLN ($1247) Buy Aug 1st weekly / Aug regular 1300 Call Spread for 17.00
Dan: Since announcing their $2.6 billion takeover offer for OPEN a few weeks ago, PCLN has lagged the internet space. The consolidation in this time period could be viewed as building steam to re-test the uptrend that has been in place of more than a year, above $1300, or possibly forming the right shoulder of a head and shoulders pattern that would be fairly bearish in technical terms. There are few large cap internet stocks that trade at a PE/G of 1 like PCLN (trades about 25x earnings that are expected to grown about 25%) which makes the stock fairly attractive from a valuation standpoint. But I have no clue which way the stock is going to break. If the market is going to grind higher, I suspect that quality stocks like PCLN will re-test the prior highs, but to make these sorts of defined risk bets I want to look to finance the purchase of calls over what could be a fairly quiet July heading into Q2 earnings that should start in earnest the week after next.
Action: Sold to close the MA ($74.85) Jul19th 80/75/70 Put Butterfly at $3.10 for a $1.22 gain
Enis: MA moved back towards our $75 mid-point of the range trade that we put on in early June. Given that move, and a nice winner on our hands, we took the profits in this structure rather than wait an additional 2.5 weeks for the trade to decay, at the risk of a big move in either direction.
Name That Trade – $DG: Nifty Thrifty Options
Hypothetical Trade: Buy the DG ($57.60) Aug16th 55/60/65 Call Butterfly for $1.85
Enis: DG implied volatility has remained elevated over the past month as the headlines surrounding DG and FDO have not stopped. Carl Icahn’s initial stake in FDO led to a big move in DG, and then his push for FDO to merge with DG was met with some residual buying as well. However, DG’s well-respected CEO announced on June 27th his intention to retire, and DG declined to a 1 month low on heavy volume. A slightly bullish trade targeting the $60 mid-point of the stock’s recent price action is a decent risk/reward proposition given the situation.
Wednesday July 2nd:
Considering Our Options: $EBAY Call Calendar
Dan: With the weekly expiration approaching, and having just turned long July calls into a calendar, we wanted to look at our prerogatives as both strikes were in the money. We decided to wait to see where the stock was likely to close on Thursday before altering the trade again.
Thursday July 3rd:
ACTION – Buy to close the EBAY (50.95) July 3rd 50 call for 1.00
ACTION – Sell to open the July regular 52.5 call at .73
New Position – Long the EBAY July 50/52.5 call spread for 1.05 (currently worth 1.18)
Dan: With EBAY likely closing $1 above our strikes we decided to roll out the bullish view by covering the weekly call and selling a higher strike call in July making a vertical spread. We now own an in the money call spread where we are risking 1.05 to make 1.45 if the stock is 1.55 higher on July expiration. We like those odds with the upcoming earnings event.
Considering Our Options – $SBUX
Enis: SBUX closed right at the $79 level that we designated as a stop on our put butterfly. If the stock trades above there for some time on Monday, then we will probably exit the position at a loss. If it stays below there next week, then we will keep the position on, looking for a move lower back to the 75-77 area.
Friday July 4th: