Trading Diary: Jan 20th to Jan 23rd

by Dan January 25, 2015 8:12 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 Jan 20th to Jan 23th:  

Monday Jan 19th:

Markets Closed for Martin Luther King Day

Tuesday Jan 20th:

Name That Trade – $PEP: Pepsi Growth Still Challenged

This stock has been on our short “hit list” for months… very simply having to do with valuation, low growth and the company’s propensity to manufacture earnings:

This is a stock that makes little sense to me on a valuation basis. It’s trading at 20x expected eps growth of 5% on expected sales growth of only 1% (after no growth in 2014).  This is a clear example of the company’s nearly $5 billion in share buybacks manufacturing earnings growth.

But why in the world would investors pay 21x for that sort of growth??  P/E is reaching 7 year highs

We are waiting for a better entry closer to $100.

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Wednesday Jan 21st:

MorningWord 1/21/15: $QCOM – Korean BBQ’ed

With QCOM getting skewered on rumors that Samsung was going to drop their Sanpdragon mobile chip from their next high-end handset, I reiterated my belief why a QCOM/ INTC merger could make a lot of sense for both semiconductor behemoths.

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Name That Trade $EBAY: A Paypal Dispute

In front of EBAY’s Q4 results which we thought they would likely disappoint. We considered taking advantage of near term elevated options prices into the earnings event to finance the purchase of longer dated calls that could benefit from some sort of renewed interest by external buyers for EBAY’s PayPal unit despite the company pushing forward with their tax free spin off of the faster growing payments division. We did not pull the trigger on this trade prior to the earnings event because we thought weak earnings and guidance would offer a better entry, which almost happened until the company and large activist shareholder Carl Icahn entered into a “standstill agreement”.

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Action: XLF ($23.35) Sold to Close Feb 24/21 Put Spread at 75 cents for a 20 cent gain

Heading into the ECB’s well telegraphed QE announcement we thought it prudent to trim some shorts, most noticeably under-performers like U.S. bank stocks.  While we generally got the direction and the thesis right on this we trade, we probably used the wrong instrument (XLF) to express this bearish view, as the weakness by moneycenter and investment banks was offset by large components like Berkshire Hathaway.  A small profit will always beat a loss in my mind, and with the sector’s subsequent bounce we felt pretty good about how we traded this into earnings and then the ECB meeting.

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Thursday Jan 22nd:

ACTION – Sold to close balance of TSLA ($201.50) Feb 210/180/150 put fly at 9.00 for a $4 profit and 4.50 average profit

We had closed half the position when the stock was near the recent lows, soon after the news that sent it reeling. We wanted to give the balance of the position to time to play out, as the settling down of the stock causing options prices to retreat would benefit the position.  Well the stock rallied a little more than we would have liked, filling in a good portion of that prior gap. In an attempt to stay disciplined we closed the balance of the trade above what could be important phycological support at $200.

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TRADE: UAL ($71) Bought to Open Feb 70 / 62.50 Put Spread for 2.20

I have not been shy about what I feel is the ridiculous need for investors to buy U.S. airline stock’s with every downtick in the price of crude oil.   With UAL’s Q4 earnings and guidance out the way I used the stock’s strength at all time highs to place a near term bearish trade.

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Name That Trade $X: US STEAL?

A large purchase of short dated out of the money calls in the beleaguered steel maker caught my eye heading into the company’s Q4 report this week.  While I can see few fundamental reasons to buy X at current levels, the stock’s nearly 10% decline on Friday on the heels of Goldman Sach’s downgrade could make short dated call purchases all the more attractive for a contrarian trade.  We are not there yet, but keeping a close eye for a counter-trend oversold short squeeze, the stock has 26% short interest.

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Friday Jan 23rd:

TRADE:  BABA ($104) Buy Feb /  March 95 Put Spread for 1.00

BABA reports their second quarterly results next week as a publicly traded company, the options market is implying about a 5% one day move which is shy of the 4% move higher on the company’s fiscal Q2 report back in early November.  While the near term focus by investors will be the company’s ability to maintain their torrid growth, I think it is important to note that they do not give forward guidance, and investors could quickly alter their focus to the 429 million shares coming off lock up on March 18th (a number greater than the amount of shares sold in their Sept IPO).

I want to use the elevated levels of IV in Feb for the earnings event and look to finance the purchase of March downside puts that will catch potential downward volatility relating to the lockup.  This is not a massively bearish trade as a move higher post earnings in line with the implied move would likely only render this trade worth half of its initial value.

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From CNBC’s Options Action:


Chart of the Day – $AAPL: Ripe for the Picking?

We will have a much more in depth preview of AAPL’s earnings on Tuesday, but in the mean time we wanted to highlight the stock’s slight breakout above the downtrend that has been in place from last month’s all time highs, while also shedding some light on the implied move in the options market:

The options market is pricing about a 4.5% one day move in either direction, which is a tad shy of the 5.35% 4 qtr avg.

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