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 Oct 20th – Oct 24th:
Monday Oct 20th:
Name That Trade – On $AAPL Watch
Enis: CC summarized some potential structures in AAPL ahead of the earnings event on Friday night, depending on your view and position. AAPL ended up breaking out to a new all-time high by the end of last week after a very strong earnings result. What most caught our attention about AAPL’s price action is that the stock moved less than its implied move on Tuesday after the event, even with a terrific number, suggesting that AAPL’s realized volatility going forward could remain more subdued than the broader market.
Tuesday Oct 21st:
TRADE: DIA ($165.11) Buy Dec 165 / 155 Put Spread for 2.60
Dan: This put spread entry turned out to be early as the U.S. market continued higher into the end of the week. The fundamental rationale for the trade still stands:
It is my sense that the DJIA’s relative under-performance (flat on the year vs the SPX up 4.6% and the NDX up 5.2%) was in large part due to the weakness in earnings of some of its components. That weakness comes from no shortage of reasons but the biggest may be legacy businesses getting hit by competition, which is what we saw this week from IBM and MCD. The most recent addition to the list is a stronger dollar. Many of the multinationals in the DJIA index get more than 50% of their sales from overseas.
However, if the DIA breaks above the 50 day moving average next week, we’ll likely take our loss on this position as the odds of the trade will be significantly against us.
Wednesday Oct 22nd:
TRADE – HD ($94.74) Bought the Feb 95/85 Put Spread for $3.05
Enis: We had laid out the rationale for a potential entry in HD in a Name That Trade post on Oct 10th. Since then, the stock made a minor new all-time high, without much volume or momentum support on a technical basis, however. As a result, we used this week’s strength as an opportunity to enter a new bearish position in HD that would benefit for a move back to $85 over the next 4 months. HD’s low implied volatility made the risk/reward proposition of this trade more favorable than for most other mega cap stocks in the current market.
ACTION: T sell to close long stock at $34.57 for a .29 gain, plus $0.46 dividend, for a total gain of $0.75.
Dan: We did not want to hold the T long stock position into the earnings event. One big reason is the bad experience I had with AT&T in the latest iPhone upgrade, which I detailed in a MorningWord post on Thursday morning. Wireless competition is hurting AT&T, and it is doing a poor job of handling the loss of customers in the process.
Thursday Oct 23rd:
ACTION: MSFT ($45.05) Sell to Close Nov 45 Puts at 1.25 for flat
Dan: The original thesis behind the MSFT trade was based on the macro situation in the market and the sentiment towards large cap tech at the time of the trade. The plan all along was to get out of the trade before the earnings event, so we took the trade off prior to Thursday afternoon’s report for flat.
Friday Oct 24th:
TRADE: EWZ ($41.75) Buy the Oct31st / Mar 46 call calendar for $0.59
Enis: The Brazilian elections this weekend have been highly anticipated in Brazil for months. The options market has priced in a 10%+ move for EWZ this coming week, very large for a country ETF. The very high price of weekly options has created a favorable term structure for calendar spreads, and we took advantage of that to buy a call calendar in EWZ looking for some possible strength over the next few months. We will revisit this trade in the upcoming week depending on how the market moves after the election results.
Name That Trade – $TAN: Solar Eclipsed?
Enis: The solar power sector has been a fundamental favorite of ours for a couple of years, but the recent drop in the price of fossil fuels has possibly changed the investment landscape for solar in the near term. We are still quite bullish on the long-term prospects for solar power, especially as solar materials costs decline and battery technology improves. However, the substitution argument in the short-term has become less in favor of renewables, and could hinder demand over the next year. The options markets are very wide in TAN, and implied volatility is high, so we did not find an attractive options trade at the moment.
Name That Trade – $FB: Liking Protection
Dan: FB is one of the only large cap internet stocks that has been a clear winner throughout 2014. Its earnings event next week takes on added importance given the recent turbulence among prior internet leaders like GOOG, AMZN, and NFLX. The stock is trading at an all-time high, so we laid out a possible protection structure for those who want to remain long stock but hedge a possible short-term pullback in the next couple of months.