Trading Diary: Sept 8th to 11th

by Dan September 13, 2015 5:20 pm • Commentary

Here is a quick recap of trades that we initiated, closed, or debated in the week that was Sept 8th – Sept 11th:

Monday Sept 7th:

Market closed for Labor Day Holiday


Tuesday Sept 8th:

New Trade – $SBUX: Extra Foam

Trade: SBUX ($54.80) Bought Oct 52.50/47.50 Put Spread for .85

Rationale: This spread is out of the money, and options prices are high, so in any other market environment this would be the exact sort of options trade we would avoid. But we feel strongly that a re-test of the lows from two weeks ago in the S&P 500 could cause another panic in crowded trades like SBUX. Given the way the broad market is moving this trade could be at the money very soon, but we will cut our losses to 50% of the premium at risk if the stock continues higher from here.

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Name That Trade – $DXJ: Big In Japan

One trader today expressed the view that at the very least that short dated, out of the money calls that capture the Sept 15th BOJ meeting are dollar cheap.  Shortly before 1pm today, when the etf was $50.28 , there was an opening buyer of 20,000 of the Sept 52 calls, paying .53 to open. They also bought 20,000 of the Sept 53 calls paying .28 to open.  These trades break-even at 52.53, up 4.5% and at 53.28, up 6% respectively on Sept expiration. In trader lingo we call that a Call Stupid.

This is not exactly how we would choose to express a directional view in DXJ, but could serve as short term leverage on an existing holding into a potential positive catalyst.  For those that think Japan equities are likely to revisit the recent lows, the Sept 50/46 put spread for about .80 is probably the best bet here. For those that think the call stupid buyer is onto something, we’d prefer spreading with implied vol so high vs what that trader did. The Sept 51/54 call spread for about .80 looks like the way to play for that move.

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Wednesday Sept 9th:

Name That Trade – Bobbing for $AAPL

Here is the trade we would consider as stock replacement for existing longs, or a stock alternative for those considering new long exposure:

Hypothetical Trade: AAPL ($111) Buy Oct 23rd weekly 100 / 120 Risk Reversal for even Money

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I discussed same trade structure using different strikes for even money on Friday’s Options Action on CNBC:

Name That Trade – $DIS: You must be this high to ride

Hypothetical Trade – Buy the $DIS ($103.20) October 105/95 put spread for $3

Rationale – this trade targets a pullback from the 200 day moving average and upside resistance back towards the middle of the new range DIS just established.  We like the in the money aspect of the trade structure to help mitigate any further decline in vol in the near term.

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Thursday Sept 10th:

Name That Trade – $CBS: About to get the Colbert Bump?

But given where the stock has been, and where it has support, upside call spreads look dollar cheap if you think the stock could retake $50 in the coming months.  For instance with the stock at $43.68 the Jan16 50/57.50 call spread is offered at about 75 cents.  Generally these are suckers trades in markets with elevated levels of implied vol, looking too far out of the money, but if the last month has taught us anything, especially in media stocks, that defining your risk is the way to go.

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Name That Trade – $EWZ: Brazil Nuts

When you see put buying in an equity etf of a foreign index, the hedge could be part of a larger picture, where an investor is looking for the cheapest disaster hedge across asset classes.  If the shit is about to hit the fan in Brazil, an equity collapse would be the last shoe to drop, spilling over from the credit and currency markets. But don’t extrapolate this sort of activity as an outright bearish commitment, especially in a risk asset that is at its 52 week lows, down 55% from its year ago highs. It’s likely against something.

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Friday Sept 11th:

New Trade $XLU: Utility Playa

Trade: XLU $41.40 Buy Oct 42/44 call spread for .50

Rationale: Utilities look poised to move given the rate catalyst in the coming week, and given the technical set up. While options in XLU are expensive in vol terms, they look cheap in dollar terms. I like the risk reward for long premium bullish trades in the near term.

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Watch our discussion on the trade from Friday’s Options Action CNBC:

New Trade $PYPL: Offsetting Payment

Trade: PYPL ($32.70) Buy Oct / Jan 35 Call Calendar for $1.25

Rationale: The idea here is to sell higher short dated implied vol (the Oct 35 calls are 45% on the bid) and the Jan16 35 calls are 42% iv on the offer).

If the stock is $35 or lower on Oct expiration we will look to turn into a vertical call spread by selling a higher strike call in Jan16 expiration, or possibly turn into a diagonal calendar by selling a higher strike call in November or December expiration when they are listed. The idea is to continue to whittle away at the long premium leg of the trade in January. But very importantly if you are in this sort of trade for a take-out which is likely a low probability event, its important to turn into a vertical or a diagonal as soon as possible to avoid being right on direction and wrong on trade structure. Regular readers know we are not fans of long premium directional strategies playing for low probability events when vol is high.

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