Trading Diary: Aug 3rd – Aug 7th

by Dan August 9, 2015 6:16 pm • Commentary

Here is a quick recap of trades that we initiated, closed, or debated in the week that was Aug 3rd – Aug 7th:  


Monday August 3rd:

New Trade – $MSFT: Tick in a Xbox

While there are few catalysts for the stock between now and October we like the idea of financing longer dated puts:

MSFT could join other stock in the PC chain in under-performing the broader market. However, with no catalysts until November expiration it makes sense to finance the purchase of November puts by selling the dog days of August with the August 45 put. If we do see continued consolidation we will be set up well and have a couple of different options to further spread the November puts.

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Name That Trade – $AMBA Sauce

The technical setup in this stock is quite interesting, especially when you consider the stock’s movement over the last few months.  While we don’t have a trade on the stock at the moment, we had the following thoughts:

My sense is that the stock is expensive, and that a takeover premium is IN the stock, and that the company’s $3.65 billion market cap, 11x expected fiscal 2016 sales, would make a deal tough for most, but not impossible (resulting in a $5 billion-ish deal.) I would guess that TXN or QCOM would be the most likely large cap acquirers, but probably only from lower levels in the stock.

The quick 30% decline in late June caught options market makers off guard, and that is not likely to happen again in the near future. With the stock at $115.50, the August 115 Straddle (the call premium plus the put premium) is offered at $11.50, implying about a 10% move in either direction between now and Aug 21st, if you bought that, and thus the implied move you would need a move above $126.50, or below $103.50 to make money. While that range is very likely, its a bit rich for my blood without a convicted directional bias.

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Tuesday August 4th:

Name That Trade $ASHR: One word – Sisyphus

Hypothetical Trade: ASHR ($41) Buy the Aug 36/ Sept 41 put calendar diagonal for $3

We remain in the camp that the Shanghai Composite will ultimately break under its own weight and the government’s inability to prop up an obvious equity bubble.  We will continue put forth ways we think make sense to express this view, with defined risk.  The trade structure that we detailed in the post attempts to take advantage of rich short dated options premiums to finance longer dated puts.

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Name That Trade(s) – $DIS: When You Wish Upon a Death Star

Prior to the company’s fiscal Q3 results I concluded my quarterly preview with this:

I wouldn’t buy this stock here with your money into the print.  In hindsight, $110 was a great buy during that consolidation, but I worry that the stock is priced for perfection at a time where sentiment is white hot. You could have said the same thing prior to earnings in early May, but at this point, with market breadth very weak, and some leadership like AAPL in a correction I think it makes sense to be cautious committing new capital to cult stocks like DIS at all time highs.

We offered stock replacement strategies for those who are long into the print, protection for those long into the print and an outright bearish trade.

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Wednesday August 5th:

New Trade – $PG Moving

Trade: Buy 100 shares PG for $76, Sell to Open 1 Oct 80 call at 40 cents

With the stock down 20% from its January highs, and approaching very significant technical support level we opined that the stock, sporting a 3.5% dividend yield could be approaching a decent long entry.  We will keep this trade on a short leash.

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Thursday August 6th:

New Trade – Getting the $LOW Down

Trade: LOW ($69.50) Buy Aug 67.50 / 62.5 Put Spread for .60

Poor technical set up, poor results relative to peer HD, trades rich to market.  We’re going out of the money slightly on this one considering the moves we’ve seen in large cap stocks like AAPL, TWX, DIS since earnings.  We like the risk reward of playing for a breakdown into an event in what is becoming an increasingly volatile equity environment for no apparent reason.

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Name That Trade – $XBI: BioShock

Hypothetical Trade: XBI ($248) Buy the August 245 puts for 6.00

The technical set up looked downright awful given the loss of leadership on the week in stocks like AAPL, DIS, TWX and TSLA.  If this trend were to continue it would eventually hit biotech stocks:

The M&A frenzy in Biotech is unnatural and frankly demonstrates toppy behavior. The XBI, the S&P Biotech etf up 37% on the year, up 75% from its 52 week lows, and only down 9% from the 52 week and all time highs made last month. It looks and feels like an epic short opportunity:

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Friday August 7th:

Name That Trade – $TWTR: Early Bird Gets the Worm

if you want to close your eyes at this point, make a bet that everything having to do with TWTR only has one way to go, then consider defining your risk while risking what you are willing to lose. Here is the trade we are considering in Jan16 expiration that would benefit from a new CEO, mild improvement in user growth / engagement trends and possibly even a takeover. We’re going to try to time this trade right at the IPO price of 26 which is likely to see some buyers (or at least have sellers take a break) and could be a short term inflection point:

Hypothetical Trade: TWTR ($27) Buy Jan16 30/40 Call Spread for $1.80

Plain and simple, we have been wrong on TWTR in 2015, but we feel strongly that there is a certain scarcity value for what is a very unique social media property that is not being reflected in the company’s equity valuation.  This is a very special situation where we feel the reasons for our bullish view will be realized, but its clearly a matter from where. Stay tuned as we could see our price in the stock soon at which point we’ll pull the trigger.

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Watch our discussion on Friday’s Options Action on CNBC: