Considering Our Options – Eat My Shorts: $DIS, $HD, $PEP

by CC January 6, 2015 2:00 pm • Commentary

We’ve had some success on this selloff on short biased trades we placed that looked to take advantage of a year end rally and then a selloff in early 2015. However, before the year end rally we had a few short biased positions that in hindsight were a tad early. With the market now coming back in off the highs there’s a chance we could get bailed out on one or more of these trades. Let’s look at the three trades, where we stand today, and what we’d need to see before we bail or hold onto the outside chance that they’d be winners.  

First let’s look at HD. We placed this trade in HD on October 22nd:

TRADE – HD ($94.74) Bought the Feb 95/85 Put Spread for $3.05

-Bought 1 Feb 95 Put for $4.44

-Sold 1 Feb 85 Put at $1.39

With the stock now $6 higher the spread is only worth about 0.90. This is a lotto ticket at this point and doesn’t even capture earnings (scheduled Feb 24th) so there’s no catalyst to lean on and we need the stock to keep going lower to help. In the meantime we’ll be looking at the 50 day moving average just below $99 as a place where we’d possibly make a decision to cut our losses if it held.

In DIS we also have a losing trade that still has some time. Here was the trade we placed back on Sept 25th:

TRADE – DIS ($88.79) Bought the April 85/75 put spread for 2.50

-Bought 1 Apr 85 Put for 3.71

-Sold 1 Apr 75 Put at 1.21

With the stock now at 91.50, this structure is worth about 1.40. This trade does capture earnings (First week of Feb) so that helps with vol and a potential catalyst. Right now the stock is flirting with its 50 day moving average (91.53) so this trade has a decent chance to recoup the losses if the selling continues. It is still significantly out of the money so any hold and bounce soon we’ll have to make a decision. On the downside it’s entirely possible to see a few dollars quick on a break of today’s support.

And finally we have PEP, which we placed a short delta trade on September 29th:

TRADE : PEP ($93) Bought to Open Jan15 92.50/82.50 Put Spread for 2.35

-Bought Jan 92.50 put for 2.85

-Sold Jan 82.50 Put at .50

The stock is basically in the same spot as our entry but we’ve lost money on decay. Right now the spread is only worth about 0.80 but it’s right on the razor’s edge of being in the money. The chart looks horrible of the stock does break its December low of around $92.50. That will be the spot we keep our eye on and will also have to make a decision there if it holds.