Since the market swoon in late August, and its subsequent rebound we have tried to be patient on laying out new shorts. We have been cautious despite the fact that we feel the U.S. stock market is transitioning from a multi-year bull market to, at the very least, a much lower return environment with the strong likelihood of an extended corrective period.
Since the start of September we have looked for short ideas on stocks that have high multiples, either relative to the market or their peer group, rely on emerging markets for future growth and/or continue to feel the adverse affects of the strong dollar on sales and profits. Many of these targets had unique positive sentiment, like Apple (AAPL) and Disney (DIS) had until recently, but may ultimately give up the ghost.
Two trades we did that fit this criteria with each checking at least a couple of the boxes listed above are going different ways in Boeing (BA) and Starbucks (SBUX), We wanted to go over where each stand and what our plans are. The first trade to look at is an Oct put spread in SBUX. We placed a bearish defined risk trade on September 8th when the stock was just below 55:
Trade: SBUX ($54.80) Bought Oct 52.50/47.50 Put Spread for .85
-Bought to open 1 Oct 52.50 put for 1.25
-Sold to open 1 Oct 47.50 put at .40
The stock has shown good relative strength since early Sept and is now just a few % from its prior all time highs made in early August. Despite the broader market being lower since that day, SBUX is actually up about 3 dollars. (the same is true today with the broader market down 1%+ and SBUX green) The move higher means that the strikes we chose are increasingly a lotto ticket dependent on a fairly sharp reversal. This was not the original intent, so the game plan now is to minimize damage and to close on a mild reversal in the shares. Right now the trade is worth less than .20. We’d love to be able to get out of the trade closer to a 50% loss in the position but at only about 10 deltas right here than means a few dollars in the stock. It doesn’t make any sense to take the loss as it is currently so we’ll try to be patient and wait for a move lower. The 50 day moving average around $56 is the level we’d target to close for a loss.
The next trade to look out is working and now it’s a matter of where we’d like to lock in the gains. We placed the bearish trade in BA when the stock was $137 on September 18th:
Trade: BA ($137) Buy to Open Oct 30th 135 / 120 Put Spread for $3
-Buy to open 1 Oct 30th 135 put for 3.80
-Sell to open 1 Oct 30th 120 put at .80
With the stock now nearly 9 dollars lower the trade is worth more than a double at $6.50. The stock is showing few signs that it will reverse anytime soon as it’s caught among a group of industrial stocks with international exposure taking it on the chin. Right now it’s about 50 deltas with a potential profit of double what it is currently worth. But time is on our side on this one as its intrinsic value is slightly more than its realized value (so it is not decaying on us). The next obvious level to the downside is about 125 and at that point we’d be close to a triple and would likely take the trade off there to lock in the gains. On the upside we’ll keep a trailing stop and any sharp reversal higher means we’d try to take the trade off for a double. $130 is a level to watch as a stop on the upside.