Trading Diary: Nov 9th to Nov 13th

by Dan November 15, 2015 6:02 pm • Commentary

Here is a quick recap of trades that we initiated, closed, or debated in the week that was Nov 9th to Nov 13th:

Monday Nov 9th:

Trade Idea – $XLU: Utility Playa

*Trade: XLU ($42.25) Buy Nov / Jan 43 call calendar for 50 cents

In the near term we might see lower lows in the XLU, possibly as low as $41, but I expect it to hold its trend at $41.25. One trade I like is a call calendar, selling short dated out of the money calls to help finance the purchase of longer dated calls playing for a bounce into the Dec FOMC meeting after a sharp decline.

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Tuesday Nov 10th:

Trade Idea – $AAPL Harvest

We offered a yield enhancement opportunity for existing longs.

vs 100 shares of AAPL ($116.20) sell the Dec24th (weekly) 105/125 strangle at 2.15

This adds just under 2% in potential yield on underlying shares over the next 6 weeks, a period that could see lower levels of volatility given the upcoming holidays. The risk on the overlay is being put 100 shares of stock at 105 or lower, and having 100 shares of long stock called away at 125 or higher. So a long holder is giving up potential upside, and having risk to adding long exposure on the downside for the potential to add 1.85% yield if the stock remains range-bound between 105 and 125.

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Trade Idea $TWTR: Bird Droppings

I am selling my long stock (most of it) at $27 and swapping into:

*Trade: TWTR ($27) Buy March 20 – 30/40 Call Spread Risk Reversal for $1

While sentiment is reaching a fairly dire spot, I see few positive catalysts between now and year end. There is a distinct possibility that more negative headlines on private tech market valuations could weigh on TWTR shares and therefore I’d rather position farther down the road and not sit with the stock itself.

This trade structure offers a potentially wide range of profitability, and aside from the 3.5% premium outlay, that breaks-even at level where the stock was trading 10 days ago, the worst case scenario is down 26% at a level where the company’s enterprise value would be below $12 billion.

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Wednesday Nov 11th:

Trade Idea(s) – $BABA Booey

We took a look at the trade set up following the stock’s massive 40% rally since late September, following the company’s $14 billion in Single’s Day sales, and concluded:

With $90 possible technical resistance and sentiment reversing into an event, the stock could set up at the very least for short back to trend near $70, or consolidate between important support at $80 and resistance at $90. Short dated options prices remain elevated from their early Summer levels, which could set up for short premium defined risk options trades that define a range.

We offered a few ways to fade the recent move.

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Thursday Nov 12th:

Trade Idea(s) – $CSCO Skid?

We took a look at the trade set up into CSCO’s earnings, before offering a couple ways to play with defined risk, I concluded:

since we outlined the bullish trade last month, its my sense that investor sentiment has changed a bit, a tad less sanguine on global growth, and the ability for US multinationals to offset currency headwinds in what could be a rising US rate and dollar environment. I find the trade set-up much less compelling now for a breakout and I am more inclined to see the stock’s reaction to guidance, and then trade.

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Friday Nov 13th:

Trade Idea – $PYPL: Bill Me Later

*PYPL ($34.65) Buy Jan16 30 / 40 Risk Reversal for a 10 cent credit

We are positively disposed to Paypal as we believe the fast growing epayments space will have many winners and likely some consolidation. But we don’t want to buy PYPL here, but I would down at $30, and I like the idea of setting up a trade structure that gives me leverage to the upside in the event of some unexpected positive news.

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Trade Update – $VIX Call Spread Risk Reversal

Given the fact that VIX expiration is Wednesday before the open, it makes sense to tighten this spread up, reduce the risk of the index settling below the short put strike that was just recently in the money.  We have dramatically reduced our profit potential in the event of a further spike, but now have no risk.

Here is how we managed the trade:

vs VIX at $20.50

  • Bought to close the VIX Nov 17 puts for .20
  • Bought to close the VIX Nov 30 calls for .10
  • Sold to open the VIX Nov 24 calls at .50
New Position – Long the VIX (20.50) Nov 22/24 call spread for even money

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*You may have noticed a new post category named Trade Ideas during Q3earnings season.  Regular readers know that we have a process for evaluating potential trades. On most instances our work yields a directional bias for a specific trade set up, but we also know that readers may have an existing position in the underlying, or use our inputs to arrive at their own conclusions.

Historically we’ve divided trade posts into two categories New Trades andName That Trades, the first being what we are trading, and the latter what we are considering, or we think would make a useful overlay to an existing position. Henceforth we’ll be combining these into Trade Ideas that will contain both. The reason for the change in nomenclature is that we’re doing work from multiple perspectives and recognize that our subscribers have very different needs and expectations. A good example is an earnings preview of a stock. We may feel that we want to express a directional view, but we know that many of our readers may already be long the stock and are looking for a hedge, or a way to add yield or leverage or merely a long stock alternative. Within that post we’ll be clear what we are trading and what we think are good trades for those with other intentions.  A typical example would be a post where we lay out a hedge, a stock alternative and/or a yield enhancement. We will clearly label those with the assumption that we do not have a position in that stock but many of our readers do. We’ll then clearly state if we are doing a trade by labeling that section Our Trade at the end of the post. With Our Trade we will continue to do follow ups on trade management of that trade, but we also will try to (to the best we can) revisit the trade ideas that we didn’t do ourselves but others may have. We feel this will make RiskReversal even more useful to our readers who often ask us for hedges and overlays to their existing stock positions and we put a lot of effort into those ideas as well but up to this point we haven’t done a great job of  emphasizing the importance of those trade ideas we don’t do ourselves. Organizationally this will be better as all the trade ideas will be on a single post and we’ll also list the hypothetical trade overlays and alternatives on a new centralized Trade Ideas page and try our best to follow up on those as well. (see that page here)

We want to reiterate that RiskReversal has never been a trade service. The trade ideas we detail are for educational purposes. We put a lot of time and thought into them. Following along with our defined risk trades (and learning from our successes and failures) is an important aspect, but equally important is learning how to use options to hedge, add leverage, yield or replace existing equity holdings in your own portfolio.  We welcome feedback from readers, and are happy to answer any questions about what we feel is a subtle change to the service that should yield more expansive trade idea content.