Trading Diary: Oct 5th – Oct 9th

by Dan October 11, 2015 6:20 pm • Commentary

Here is a quick recap of trades that we initiated, closed, or debated in the week that was Oct 5th to Oct 9th:

First on the markets. We remain confounded by the rally in U.S. equities. If you are looking for long ideas to play catch up, you WILL NOT find too many here. We are trying to be patient to pick short entries in stocks/sectors that we think have shown there hands so to speak, but we will only be inclined to add long exposure in very specific situations.  On Friday morning I detailed some thoughts about the recent 8% one week bounce here: 

MorningWord 10/9/15: ¯\_(ツ)_/¯

investors buying stocks, playing catch up for the fear of missing out are no longer rational. For the first time in years a pause in global growth and the bursting of asset bubbles after years of unprecedented monetary policy now pose the potential for systemic financial risk, across geographies (thankfully not likely to start in the U.S. this time). That is a fact. Central banks the world over had lots of ammunition and tools at the disposal to combat systemic risks the last few years. I think it is safe to say they lack them now (WSJ: U.S. Lacks Ammo for Next Economic Crisis).

An announcement (and implementation) of QE4 would represent a disaster for risk asset values. Global investors would have to adjust risk appetite and return expectations vs the reasons behind more easing. Namely a global profit recession and the potential for a protracted bear market in almost every risk asset class on the planet. This is not a prediction, there’s no telling how investors would react initially, but it is a rational expectation.

To those that seem like they want to squeeze the last 10% in their favorite growth stock, I say have a ball. But know the number of chairs is getting thin and the music is about to stop.

The only down year in the SPX since 2002 came in the crash of 2008. The great recession barely put a dent in risk asset prices aside from that year itself. We’ve completely forgotten what a protracted bear market (like 2000-2003) feels like.

The point of this post is not lobby readers to panic and sell all their stocks. I just want to state that while I’ve not been correct on the near term price action I am still convinced about what comes after. There are still plenty of opportunities on long side, and we have tried our best to pick ones that work within our world view (XLU, XLP and TLT). But we want to avoid high valuation, high growth stocks (e.g. FANG & Biotech) and fade these sharp broader market rallies


Monday Oct 5th:

Name That Trade – $SPY Game

We took a look at the technical set up in the SPY, and frankly if the recent rally fails at the September highs things look a bit grim, with the uptrend that has been in place from the 2009 lows will not only have been broken, but failed on a couple important tests.

Read original post here

Name That Trade – $TWTR: It’s simple @Jack: You never go half CEO

After TWTR’s announcement of Jack Dorsey as the permanent CEO, and the stock’s subsequent 10% rally  we considered an options overlay that might provide yield and or leverage to existing longs.

Read original post here

The stock closed the week up 15% on the week, and the strategy described above is beginning to make a lot more sense as we head into Q3 earnings.  I discussed on Friday’s Options Action:


Tuesday Oct 6th:

New Trade – $XLF: Take it to the Banks

Trade: XLF ($23.10) Bought Oct16th 23 put for .25

We think Q3 earnings are going to be weak, and given the uncertainty about rates hikes think forward guidance could be as well. We want to use last week’s strength as a good entry to play for a re-test of the recent lows in the XLF.

Rationale: risking 1% of the underlying etf price to break-even down 1.5% with what earnings catalysts. This is something we probably won’t spread unless selling occurred into the bulk of the earnings events. Ideally we’d be able to simply trade out of the put with the etf lower on those earnings.

Read original post here


Wednesday Oct 7th:

Name That Trade – $AMZN Straight Fire

We took a look the implied move in the options market prior to AMZN’s Q3 results do out in a couple weeks and also the technical set up and concluded:

The volatility bands have massively widened during the recent consolidation since earnings in July, but the stock is now butting up against the top end of the range showing very solid relative strength.  Last quarter the stock broke out to a new high and ran into the print, which it could be setting up to do again. We will take another look closer to the report.

Read original post here

New Trade – Trader $VIX

Trade – Bought the VIX ($19) Nov 17put 22/30 call spread risk reversal for .20
  • Sold to open 1 Nov 17 put at .80
  • Bought to open 1 Nov 22 call for 1.65
  • Sold to open 1 Nov 30 call at .65

Break-Even on Nov 18th Expiration:

Profits: above 22.20, of up to 7.80 up to 30, max gain of 7.80 at 30 or higher

Losses:between $17 and $22 lose 20 cents paid for structure.  Below $17 lose 20 cents and penny for penny with the index.

Rationale:  It’s unlikely we see the VIX below 15 or 16 over the next few months and therefore the risk on this trade is probably around $2. The reward is more and all we need to realize some of that potential is one spike in the VIX between now and November expiration. Of course timing is crucial on profit potential. If a spike happens sooner than later we need it to be big in order to truly realize big profits on this trade. If it happens closer to November expiration we need less of a spike. This holds true if this trade is used as a portfolio hedge. The VIX is cash settlement on expiration. Ideally we’d take the trade off before then but the risk on this trade is really that the VIX drops back towards it’s lows and the short 17 put is in the money. We think that is unlikely but even if it happened probably is not by much.

Read original post here


Thursday Oct 8th:

Name That Trade – $ASHR: Fine China

We still think Chinese A Shares are not done going down in 2015 and will round-trip their entire one year. We are trying to be patient for a short entry in the A Share etf ASHR.

Read original post here

Name That Trade – $XBI: Bad Bio Rhythms

Biotech stocks are desperately trying to put in a bottom after such a sharp drop over the last month. We like a short entry back near the downtrend, playing for a break of $60 in the coming weeks/months.

Read original post here

MorningWord 10/8/15: Bad Breadth Behind Those FANGs – $QQQ

Its our opinion that the outperformance of a very small group of stocks in the Nasdaq 100 pose a massive risk to the index as it appears that most stocks are in a correction.

It’s clear that a handful of stocks with fabulous gains are doing the heavy lifting and representing the relative outperformance. To do some quick math, 20% of the NDX (FANG) accounts for nearly $250 billion in market cap gains on the year, on a $5 trillion index that is only up 2.3% on the year, or about $115 billion.

Read original post here


Friday Oct 9th:

Trade Update – $XLP: Closing Nov Calls for a quick gain

Action: XLP ($49.45) Sold to Close Nov 47 call at $2.75 for a $1.30 gain

The XLP has rallied only 4%, but that rally has the calls we bought last Friday nearly at a double. We are going to take the quick profit and move on.

Read original post here

New Trade – $XOM: Dead Tiger Bounce

Trade: XOM ($79.50) Buy Nov 77.50 / 70 Put Spread for 1.45

Read original post here

Watch discussion from Friday’s Options Action on CNBC:

New Trade – $F 180?

Trade: Ford ($15) Buy Nov 15 / 13 put spread for .52

The stock has come back to its downtrend, and now looks vulnerable for a re-tracement back to support at least until $14 and possibly the prior lows near $13. Ford is set to report Q3 earnings on October 27th. With monthly sales out of the way, we expect a good Q3, so it will be Q4 guidance in focus.

Rationale:  The news has been very good, but until very recently the stock has acted very poorly. The stock’s recent bounce could already incorporate any additional good news on their earnings call.  From a purely technical basis, the bounce back to the downtrend offers a good defined risk short entry.

Read original post here

Also I was quoted in Barron’s The Striking Price by Steve Sears – Options Strategies for Bearish Investors

The column highlighted some large bearish options trades in the IWM, the Russell 200 etf, and I was asked to offer a hypothetical hedge in the small cap etf:

Dan Nathan, a trader who runs, likes “put spreads” on the iShares Russell 2000 ETF (ticker: IWM). That exchange-traded fund recently broke an uptrend in place since 2009, and is down 11%, to $115, since hitting an all-time high in June. “Protection below the recent low of $107 seems prudent, as there is little technical support below,” Nathan says in an e-mail.

INVESTORS WHO WANT TO HEDGE the IWM into year end can buy December $110 puts that expire Dec. 31 and sell December $95 puts with the same expiration date. The spread recently cost $2.35.

If IWM falls to $107.65, the put spread breaks even. If IWM is at $95 at expiration, the spread is worth $12.65.

Nathan notes that the Russell 2000 is the only major U.S. equity index to have broken through its August low, a fact that is starting to attract attention.