Trading Diary: July 7th – July 11th

by Enis July 13, 2014 6:53 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 July 7th – July 11th:

Monday July 7th:

Name That Trade – Avenue $QQQ

Enis:  The QQQ became extremely overbought, and the ETF is rapidly approaching the psychologically important $100 level.  We have been surprised that implied volatility has remained so low even as QQQ has hit new bull market highs, as that situation is in contrast to the prior situations where QQQ became quite overbought near a new local high.  Long volatility positions in QQQ look attractive as a result.

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Tuesday July 8th:

New Trade: QQQ ($94.35) Bought to Open Aug 94 put for 1.35

Dan: After what amounted to the largest down open in months, we used the intra-day bounce off of the morning lows to enter a bearish directional trade in the QQQ.

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Name That Trade – $SODA Pop?

Dan:  As the stock approaches massive long term support at $30 we think the stock could start to become interesting as a potential takeover candidate given the massive push by Coca-Cola into the at home soda market with their strategic partnership and investment in Green Mountain earlier this year.  We are hesitant to make a bullish bet into their Q2 earnings later this month, but the mounting disparity between short and long dated implied volatility could offer a few interesting set ups.  We will take a closer look as the earnings event approaches and after we have done a deeper dive on the fundamentals.

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Name That Trade – $EXPE:  Called for Traveling

Enis:  Expedia has been a stellar performer over the past few years, benefitting from the secular trend towards online travel booking vs. the traditional travel agent route.  While EXPE has not appreciated nearly as much as PCLN in that period, the stock is still trading near a 5 year high in valuation terms (based on P/E multiple), an indication of the excitement surrounding the stock.  However, the company has had a hard time growing earnings since 2011 as a result of the heightened competition.  We have our eye on the Aug 80/70/60 put butterfly, which could be interesting if it gets below $2 ahead of the late July earnings report.

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Wednesday July 9th:

Action: Sold to Close 2nd half of P ($26.39) Sept 28/35 Call Spread at 1.50 for a .55 gain

Dan:  After booking more than a double on the first half of this position as the stock neared technical resistance a couple weeks ago, this week’s decline demonstrated how quickly investors will be to take profits on the slightest bit of volatility in the broad market.  We decided to close the balance of the position and book what was a very nice gain on a contrarian long.

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TRADE – ADSK ($55.70) Bought Aug 55 / 50 Put Spread for $1.38

Enis:  AutoDesk has been a major winner over the past year as investors have become enamored with SaaS companies.  ADSK is in the process of migrating its customers over to a subscription model, and the stock had a strong May report that led to new all-time highs.  However, the stock has stalled near the prior highs in the past couple of weeks.  This technical resistance above, as well as what we view as a precarious backdrop for growth stocks as a whole, led us to initiate a trade.  It’s our first simple long put spread in more than a month, taken because implied volatility in ADSK is relatively low.

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New Trade: TLT ($113) Bought to open Sept 112 put for 1.90

Dan:  It is just a tad counter-intuitive to me that in the week that the FOMC signaled that they will be done with QE in October that yields refuse to go higher.  It appears that there is more than enough demand for U.S. Treasuries to replace the FED.  It is our view that those buying bonds in the current juncture of the economic recovery think that the Fed is wrong in their optimism.  After TLT’s fairly sharp bounce from just above $110 in the last week we wanted to make a short term bearish bet that rates ultimately rise and bonds make new multi-month lows. We are going to keep a short leash as we have no edge when it comes to this sort of trade from a fundamental standpoint and if bonds don’t fail here we do not want to be caught short in a breakout above 1 yr highs at $115.  See our further discussion from Friday here.

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Thursday July 10th:

Action:  Sell to Close RIG at $43.24 for a $1.91 loss (or about 4%)

Enis:  We waited for RIG to break above the long-term resistance level at $45 over the past few weeks, but the stock repeatedly failed near there.  The stock broke its 50 day moving average on Thursday, hurting the technical picture.  We decided to take the small loss rather than wait around for this stock to turn around, even though the fundamental valuation remains quite cheap, pricing in a decent amount of bad news in the stock.

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Friday July 11th:

Name That Trade – $SBUX:  Over Caffeinated

Dan:  SBUX is the textbook definition of a cult stock, where investors are an enamored with the stock as much as their products and willing to assign it a higher multiple to its peers and the broad market. SBUX appears to be executing very well it what appears to be a challenged environment for the U.S. consumer.  The stock’s recent 10% rally heading into the company’s fiscal Q3 earnings on July 24th clearly raises expectations, and with the stock trading at 32x expected earnings that are only supposed to grow 20% seems a bit steep and the stock appears “priced for perfection”.  It is our view that the slightest bit of disappointing news the stock could re-trace half of the recent bounce from $70.  We do not think this in appropriate entry so far in front of earnings, but if the stock is here or prior heading into the print we would like look at vertical put spreads as a way to play for disappointment.

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