Trading Diary: Dec 8th – Dec 12th

by Dan December 14, 2014 6:50 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 Dec 8th – Dec 12th:  


Monday Dec 8th:

Action: GOOGL ($532) Sell to Close Dec 550/525/500 Put Fly at $11.25 for a $7.60 profit

We had a great entry on this short biased trade, with a trade structure that helped us stick around as the stock seemed to be going sideways near our long put strike.  We got the stock’s direction right, the magnitude of the move generally right. Timing worries were the reason we closed the trade now but the structure could be worth a lot more if the stock were to close in and around the current levels.  As we said in the post, when the the stock was at 532 and this structure was worth about 11 there was about 7 dollars of intrinsic value that had yet to decay (at 532 on expiration this trade would be worth 18). That 7 dollars represents the expected movement in the stock between now and expiration. The mark to market value of the trade will continue to converge with the intrinsic value as we get closer to expiration. It does that in a non linear way as that convergence accelerates the closer we get.

The problem with waiting around for that is that there’s still delta risk. The structure is short about 25 deltas this morning. Like the decay of the structure, those deltas also grow everyday the stock is below 550 and above 525 (below 525 the structure is long deltas). In a 500 dollar stock that’s significant because the stock could easily bounce 10-15 dollars, making waiting around for 7 dollars in decay look dumb.

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TRADE – YUM ($76.60) Buy the Jan 75/70 put spread for 1.15

After MCD’s less than stellar same store sale results worldwide, but particularly the U.S. and China, it seemed like an attractive entry on the short side for YUM in front of the company’s annual analyst meeting.  The stock had run 20% from the October lows, and seemed to be discounting good news that should have been less than certain to come given their exposure to China and the strong dollar.

Read here

Tuesday Dec 9th:

Name That Trade – $UAL: Fasten Seatbelt Light On?

I just don’t get the need for investors to chase airline stocks. Like are they the only sector in the entire economy who benefits so profoundly by lower input costs.  I get that jet fuel is something like 30% of their fixed costs, but they hedge right? And when oil prices are high they pass through a good bit of those costs through surcharges. Will they not blink the other way and start lowering prices? But one thing I do know is that the stock’s of these companies are cheap for a reason.  This industry was on the brink of a government bailout for the umpteenth time not to long ago, and I would expect after the last few years of consolidation, virtually making the industry in the U.S. a cartel, these guys will find a way to screw things up once again low oil or not.  I am a bit fixated on UAL for reasons mentioned in the post, but not ready to pull the trigger on a short trade.  Stay tuned, its on our radar.

Read here

Wednesday Dec 10th:

ACTION: Sell to Close YUM ($72.50) Jan 75/70 put spread at $2.50 for a $1.35 profit

As I suspected, the company did in fact lower guidance, citing weak results in China.  With the shares having touched $71 at the low end the put spread, and subsequently bounce, I decided to take the very short term gain and move on. The trade was an “event” trade, the event came and went, the news went the way I had hoped, no reason to wait around for the position to go against me.

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Trade: COST ($144) Bought Jan 143 / 135 put spread for 1.70

With the stock making new all time highs as a result of better than expected earning, which followed last week’s better than expected same store sales for November, it was my view that the strong CURRENT fundamentals were clearly IN the stock at current levels.  Who was the incremental buyer of the stock, trading at 28x expected mid to high single digits earnings growth, besides shorts?  Well that was just it, the stock’s exuberant gap was fueled by short covering, which drew in those inclined to take profits after such a massive run from the 2014 lows.

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Chart of the Day – $TSLA: Dead Battery?

I took a look at the waning momentum and the increasingly precarious technical set up in TSLA.  Short dated implied volatility remains relatively low to TSLA’s historical price action, especially when you consider the fact that the stock is down more than 30% from its all time highs made a few months ago.

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Oil Stock Vol. It’s a Trap! – $COP

CC had a great educational post on implied volatility of oil stocks and some take aways from

Read here

Thursday Dec 11th:

Name That Trade – $IWM: Don’t Sweat the Smaller Things

We have had more than a few questions regarding the Russell 2000’s relative strength to the S&P500. After an entire year of massive underperformance the IWM was doing its best to hold its ground into year end above $115 and we laid out a near the money, seemingly dollar cheap way to play for a move back to the 2014 high by year end which risked less than 1% of the stock price.  We are not in the camp of playing a laggard for a year end rally like the IWM, but we thought the trade offered a better than decent risk reward for those inclined to take a shot.

Read here

Friday Dec 12th:

Trade: XLF ($24.40) Buy Feb 24/21 Put Spread for .55

For those looking for a sort of “next derivative” trade for the crash in oil, short U.S. financial stocks could be it in Q1 2015.  It is my view that sustained low prices will result in job cuts, increased equity and debt volatility, dividend cuts, possibly a few defaults by oil and related companies and ultimately the decision for some sort of corporate credit event with fear of such already evident in the high yield debt market. Not to mention the potential for a sovereign credit event for countries such as Russia, Brazil and/or Venezuela whose economies are very levered to the price of oil. My trade on the XLF doesn’t even need a credit event to actually occur, merely the potential fear of contagion could cause further downward volatility in equities, and if that is the case, bank stocks will be a very likely target for profit taking.

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Watch my discussion from Friday’s Options Action on CNBC: