Trading Diary: Nov 23rd to 27th

by Dan November 29, 2015 2:24 pm • Commentary

Here is a quick recap of trades that we initiated, closed, or debated in the week that was Nov 23rd to Nov 27th:

Monday Nov 23rd:

Trade Idea – PFE: Yield Injection

*Trade Idea: Bought 100 shares of PFE for $31.35 and sold 1 Jan16 33 call at .45

Rationale: If the stock can find its footing in and around current levels, and remain range-bound in the low $30s, then the potential to sell 5% out of the money 2 month calls against stock creates the potential for a sort of super yield situation. If you are of the belief that the proposed synergies of these two companies, making the largest pharma company in the world, coupled with what will ultimately be large tax savings makes PFE a must own stock in the space, then it makes sense to look to help finance owning the stock for the time being.

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Tuesday Nov 24th:

Trade Idea – ARMH: An ARM and a Leg

Considering tax inversion candidates in technology.

a potential acquirer would be Qualcomm (QCOM) which is also fab-less, like ARMH, and relies on licensing fees for their designs. Per Bloomberg; “Qualcomm gets about 60 percent of its operating income from licensing its mobile technology”. With QCOM, the issue is less tax payments, as the company has paid less than 20% for the last five years, but the potential need for growth, which ARMH has with 15% expected earnings and sales growth in 2016. QCOM is down 33% on the year, down 40% from its all time highs made last year, trading at 4 year lows, and has a pile of cash ($31 billion, $20 billion net of debt) burning a whole in its balance sheet, on a $74 billion market cap. Activist investors are present in QCOM and they have pushed for increased capital return to a corporate split, maybe an all of the above with an inversion deal would do the trick?

Trade Idea – ARMH ($48.88) Buy the April 42 / 55 risk reversal for .20

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Wednesday Nov 25th:

Trade Idea – GRMN: Recalculating

In a similar light to the ARMH idea from the prior day, GRMN screens as a takeover candidate as it is a cheap stock, positioned in the nascent wearables space, and headquartered in Switzerland which could make it a potential tax inversion candidate, but:

Playing simply for an inversion is too myopic. But if you believe the balance sheet, the stock’s poor performance and the potential for a acceleration in growth in their fitness division next year could make the stock attractive into 2016, and you want the possibility of some sort of tax inversion as your lotto ticket on top of that, then you may want to consider the following trade:

Trade Idea – GRMN (38.13) Buy the Dec/ April 40 call calendar for 1.20

Rationale – Implied vol is low and options are dollar cheap so calendar vs. a straight call purchase depends on whether you want to continue to finance the April call. In this situation you want GRMN to slowly approach 40 into year end. Ideally, once the December portion of the trade expires you would be left with a dollar cheap upside call with several options to further reduce premium risk or simply let it ride at that point if the stock is strong in the beginning of 2016.

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Thursday Nov 26th:

Markets in the US closed for the Thanksgiving Holiday.


Friday Nov 27th:

Careful What You Wish For – AAPL

On a shortened trading session, and Black Friday underway, I took a look at what is quickly becoming a fairly crowded product offering for AAPL in both price points of mobile computing devices and size.  The post was in response to AAPL’s recent introduction of the nearly 13 inch iPad Pro, which CEO Tim Cook CEO suggested in a post launch interview, the device could and might replace laptops in the not so distant future.  Its my sense that the 10 choices of iPhone & iPad from $100 to $1000, in sizes from 4 inches to 13 inches is in some way shape or form will cannibalize either their current laptop offerings, or ultimately mean the death of the tablet all together.  Either way, AAPL needs to figure out whats Next, as the tablet is certainly not it, when investors want to see the future of innovation for the company.

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*Refers to Our Trade, explanation from late October:

You may have noticed a new post category named Trade Ideas during Q3 earnings 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 and Name 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.