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 15th – Dec 19th:
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Monday Dec 15th:
Name That Trade – $AA: Alcoa Can Wait
Discussed the bearish case for AA, but targeting a slightly higher trade entry as the stock had declined and stopped right where it should have, its 200 say moving average. We thought there was a strong likelihood that the stock held, but we also know that it has been a very bad strategy to press oversold stocks on the short side in this bull market.
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Tuesday Dec 16th:
ACTION – Bought to close the XRT (92.70) Dec 90 put for .20, sold to open the March 85 put at 1.65
New position – Long the March 90/85 put spread for .25
With the oversold condition in the market, heading into the FOMC meeting and the potential for a broad market bounce we used the opportunity to roll our short strike and lock in some of the appreciation in the March puts and turn into a vertical put spread. We now have a $5 wide put spread on for 25 cents.
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TRADE: TLT ($126.55) Buy to Open Dec 26th (weekly) 126 weekly put for $1.00
Treasuries appeared a tad overbought heading into the Fed’s 2 day meeting. It was our sense that they been a massive beneficiary on a short term basis of the fear associated with crude oil’s decline and the apparent troubles with Russia’s current meltdown and the fear of contagion. We were not of the mindset that the U.S. Fed would add fuel to the prevailing fires and that any sort of calm from the Fed would result and short term weakness in bonds. We took a near term defined risk position that the TLT would sell off post the Fed rate decision.
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Wednesday Dec 17th:
Considering Our Options – $ALTR Jan Put Fly
A couple weeks ago we defined a range to the downside to play for a re-tracement in ALTR shares. With the stock at the same spot where we placed the trade we thought we would take the opportunity to consider our options.
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Name That Trade – $DE: Deere in Our Headlights
Laid out the near term bearish case for Deere, but wanted to wait for a better entry closer to $90.
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Thursday Dec 18th:
Action: TLT ($124.40) Sell to Close Dec 26th (weekly) 126 weekly put at 2.05 for a 1.05 profit
On Tuesday, prior to the Fed meeting, I placed a very short term bearish trade on the TLT with the thought that the commentary would calm some of the current fears in the market, and bonds could pull back a bit from the recent re-test of the mid October panic high. After the massive rally in equities on Wednesday and Thursday, treasuries did in fact pull back, sending Treasuries lower. With the trade worth double what we paid on Tuesday, we decided to take the profit and move on as the continued volatility in crude oil spook us a bit on Thursday, despite the S&P500 having its best day in more than a year.
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Trade: DE ($89.37) Bought to Open Jan 30th weekly expiration 88 / 82 put spread for 1.45
We suspect Emerging Market economic weakness will take centerstage in the onset of 2015, while this stock is not expensive on a valuation basis, we think their exposure to EM and commodities could weigh on shares after the stock’s recent bounce which as been contrary to the action in peer CAT.
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Name That Trade: $CSCO’s CEO Gots To Go
CSCO trades at almost 13x current year’s expected earnings that are supposed to grow only 3% on 3% sales growth. The company pays a dividend that yields 2.8%, a monster buyback fueled by a massive cash balance of $52 billion ($31 billion net of debt), equal to 37% of their market cap. If there was ever company that needed to simplify their offerings, get rid of some legacy businesses and get up to speed with some new secular trends it would be CSCO, and John Chambers is NOT the guy to do it. Almost any outsider will do in my opinion. This sort of announcement would have the stock up 10% in a week, and likely 25% in 6 months (in a market similar to the one we are in now).
Wit the stock around $28, long dated options aren’t very expensive in dollar terms even as they are at the mid range of historical vol. For instance, the July 30 calls are offered at about .66, while the Jan16 30 calls are offered at about 1.15. That’s a lot of time for a breakout to occur, and these won’t decay much in the next few months (there is a .19 quarterly dividend). But the issue for me at the moment is entry, $25/$26 area seems like a far better entry than 60c from the 52 week highs. You’ll hear me say this a lot that I don’t want to chase stocks and this is a great example of where I’d rather let it come my way a little bit and then follow up with the trade. Long dated upside calls make sense for this but I’d love to get a better entry and perhaps a lower strike than those Jan 30’s
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Watch my discussion from Friday’s Options Action on CNBC:
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ACTION – Sold to close the GE ($24.80) Feb 26 Call at .35 for a .30 loss
Two weeks ago we took long exposure in GE looking to play a Dow laggard into what we felt were two potential positive catalysts (analyst day this week and Q4 earnings in Feb). We bought the (at the money at the time) 26 call in February with the thought that if the market closed near the highs of the year that GE could start to play some catch up. Since then the market has gotten hit and GE has along with it. Now that previously at the money call are upside calls we need a big rally from this point to have a chance to be profitable. We are not inclined to wait around for that. As with most long premium directional plays we usually look to stop our losses at 50% of the premium paid.
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Friday Dec 19th:
ACTION – Sold to close the the GM ($32.55) June 33/38 call spread at 1.35
A month ago we initiated a long delta structure in GM after it had bounced off lows and was at its 50 day moving average. Since putting on the trade GM got hit with the downdraft in the broader market. With the rapid rally we’ve seen the last few days it is now a winner but it spooked us a little and we wish we had timed a better entry. Since the spread is still out of the money we don’t want to get caught in a range bound stock with falling implied volatility on upside calls. We’re going to take some small profits and keep it on our radar to perhaps get involved again lower in the stock.
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ACTION – Sold to Close the WYNN ($150) Dec/Jan 180 put calendar at even
This was a disaster of a trade. We have been right on direction of WYNN for most of the year and designed this trade structure to play for an early 2015 decline. We obviously did not expect a 25% decline in one month, making this trade worthless. I can not think of a calendar that we have detailed on the site in a very long time that has gone to expiration worthless due to a substantial move against the strike, one of the reasons we have liked the structure in a low vol market.
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TRADE – Buy the QQQ ($104.40) Dec 31st quarterly/Feb regular 101 put calendar for 1.45
This trade structure fades a QQQ sell-off by year end, just above the recent lows with the sale of the Dec 31st puts in order to finance what could a play for what could be an early year pullback from recent highs in the broader market. We don’t think the problems that hit the market last week are going away anytime soon and after the holidays and year end positioning it makes sense that the market could see some action in the early months of 2015. It’s entirely possible that that first move is higher in early Jan, so that’s why we like selling the Dec 31st puts to finance Feb. When that expires we’ll have the chance to roll the short put to either Jan or Feb in order to have the bearish bet on for as little risk as possible.
This structure could also work as a hedge against a portfolio but it’s not a pure hedge until after the New Year as there is that chance that we return to selling before year end. We don’t think that’s that likely, but it is possible if oil selling continues or emerging market fears flare up again soon.
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Watch my discussion from Friday’s Options Action on CNBC: