September’s Dozen Update
It's only been three weeks but it's time for an update!
Back on the 3rd, I had said: "Let’s take a look at a quick dozen trade ideas for short-term gains. I like all these stocks long-term too (it’s always better to play short-term where your fallback is you own the stock long-term) but we haven’t been doing much gambling lately as it’s all been boring-old hedged positions that were smart, but not really giving us that immediate satisfaction you can get from some quick, monthly gains."
And what a month it's been, a dozen stocks, about 30 different trade ideas and we're already up to our 50% and 100% goals on most of the shorter-term ones. The longer-term positions are mostly looking good and we have hedged to cover them but let's go over each postiion to make sure it's worth keeping. I already called an out on HMY as they poked through $11.50 the other day but that was a directional trade (the October $10s) that was already up 133% and one thing we're not is greedy, right?
HMY was the only trade that was a pure short-term, directional trade. Virtually every othe stock had longer components and that's where our decision-making process comes in. I went over the logic of each entry in the original post and I won't rehash it here as we'll just look over the possible trade adjustments and decide what looks good to keep and what to cash. For purposes of this discussion, we'll use this multi-chart which indicates the 20 (blue) and 50 (red) dma:
So, how worried are we? We picked these stocks based on fundamentals. As you can see, they certainly didn't have any upward momentum on Sept 3rd! It should be no surprise that they outperformed as the market rose 10% for the month but the question we have to ask now is: How comfortable do we feel about holding them through a downturn? One of the reasons we us disaster hedges and short-term hedges is that, rather than just feel compelled to cash out as we hit resistance on our positions, we now have a cushion that we can sit back and CALMLY observe how our stocks handle a market pullback.
BRCM
- Sept $32 calls at $1.25, out at $3 – up 140%
- Oct $30 puts sold for .70, now .20, up 71%
- Jan $30/34 bull call spread at $2.15, now $2.45 – up 14%
- 2012 $22.50 puts sold for $2, now $1.70 – up 15%
What we have here is the end of a very aggressive directional play where we used the sale of the $30 puts to pay for the $32 calls for net .55 on that pair. These are great plays for situations like we had on the 3rd, where we weren't sure BRCM would go up, but we sure felt good about entering a position at $30, or net $30.55 as the case may have been. Once you complete one leg of a trade like this, you have to think long and hard about the risk you are taking with the other leg.
On the one hand, the extra $1.75 profit means we are lowering our basis on the Oct $30 puts to $28.05 but boy will we be pissed at this point if we get assigned there. At $33.87, it's not a big concern but we need to set a stop at .35 on the puts, so we don't give up more than .15 of our gains.
On the longer spread it's a little different. Are we willing to buy BRCM for net $22.65 in Jan 2012? If yes, then the $30/34 bull call spread is essentially a free trade other than the patience required to get our $2 back (when the $22.50 puts sold expire) but, selling a long put, that's what we expect anyway. I still like that put sale naked, even at $1.70 as it's a hell of a discount on BRCM.
Anyway, what have we learned since September 3rd (see Microwave Oven Theory) to help us decide what to do going forward? BRCM topped out at $36 in mid-September but then dropped hard and fast through the 50 and 200 dma back to $32 – but held that! Overall, their move was WEAKER than the SOX, which went straight up 13% during the same time-frame so, from a technical perspective, BRCM is not that strong. Since we paid $2.15 for the bull call spread, we need $32.15 to break even and the most we can make is $1.85 on that leg so, at up .30, if they fail to hold $33.50 we can just kill this leg and ride out the short-put.
TRLG
- Apr $15 puts sold for $1.50, now $1 – up 50%
- Jan $17.50 buy/wite at $13.45/15.48 – on target (TRLG at $20.88)
This one is a no-brainer as we are way in the money so no worries unless we fail that rising 20 dma. Actually, if they do fall back to the 20 dma and hold up, I'd be inclined to make a more aggressive upside play on them as they are a very nice retailer (with good ads!).
KR - I dropped the chart for KR as it's the same as SWY with all the same fundies as SWY and we can only do 9 charts at a time…
- 2012 $20 puts sold for $2.65, now $1.80 – up 32%
- Oct $19/$21 bull call spread at $1.75, now $1.65 – down 6%
- April $18 calls at $3.20, now $4.50 – up 40%
What was originally an Oct $19/Sept $20 bull call spread burned us and the roll to the Oct $21s cost another .80 so, at this point, it's better to take the small loss on the spread and move on. The Apr $18 calls need a very tight stop – pretty much if the now $22.09 stock can't hold $22 but the puts make a nice net entry of $17.35 so that's just a matter of whether you like them for a long-term play or not.
SWY – Don't forget the theme was value and safety last month. If the market breaks higher, safety becomes a bit less of a concern and grocery stores start to seem a little dull(er).
- 2012 $17.50 puts sold for $2.10, now $1.45 – up 30%
- Oct $18 calls at $1.65, now $3.20 – up 93%
- Jan $17.50/20 bull call spread at $1.45, now $1.95 – up 34%
- Jan $17.50 puts sold for .85, now .30 – up 58%
Again, these are always tough but now it's tying up way more money than we comitted and that's the bottom line. This is how much these positions made in 3 weeks so the question is will we make 20% more next month (at least) with these same positions at little risk or are we better off going to cash and PATIENTLY waiting for the next really good opportunity. I think B is the obvious choice for a grocery store that's up 12.5% in 3 weeks.
I guess this kind of goes towards what our general market outlook is. We are in the middle of the upper end of our range with perhaps (we think) another 5% left to move up before we become seriously concerned the indexes are overbought. They are a bit overbought now due to the speed and low-volume of the recent rise – it's like building a house of cards fast instead of carefully – it's much more likey to fall, and low volume is like removing one quarter of the cards holding things up. A rational person will get more and more nervous as each level is added, right?
HRB
- Jan $11 puts sold for .85, now .50 – up 41%
This is just a toss at a cheap entry so no need to do anything other than wait for the other 59%.
NDAQ
- 2012 $17.50 puts sold at $2.50, now $2.10 – up 14%
- Jan $19 calls at $1.40, now $2 – up 50%
- March $15/19 bull call spread at $2.50, now $2.90 – up 16%
- March $17 puts sold for $1.20, now .70 – up 42%
Notice how those sold puts perform much better than the vertical part of an artificial buy/write. This is why I'm not a big fan of stand-alone verticals, you don't get an early pay-off… This one went just like we thought with the markets coming back adding fundamental support so no reason to bail on this one as long as they hold the 50 dma at $19.50.
SNDK
- Jan $32 puts sold for $3, now $2.40 – up 20%
- Oct $32/36 bull call spread at $2.50, now $2.75, up 10%
- Oct $35 puts sold for $2.20, now $1.25 – up 43%
- Sept $35/37 bull call spread at $1, expired at $2 – up 100%
- Oct $33 puts sold for $1.40, now .60 – up 57%
Like BRCM they are all over the place and weaker than the SOX but we like them for a long-term hold and we already cashed $1 so good unless we begin breaking down, at which point we salvage what we can. The stock is at $35.85 so it does seem kind of silly to give up on the Oct $32/36 spread with just a quarter (out of $1.50 possible) unless there's a good reason. Do we think they hold $32 through Jan? Yes, so it's really all about watching the October positions with stops.
IRM
- Apr $20 puts sold for $1.70, now $1.25 – up 26%
- Apr $17.50 calls at $4.30, now $4.65 – up 8%
- Apr $17.50/22.50 bull call spread at $2.90, still $2.90 – even
- Apr $20 puts sold for $1.70, now $1.25 – up 26%
- Oct $22.50 calls at .30, still .30 – even
We didn't think this one was going to be exciting but it's going nicely and if they pop that 50 dma at $22.10 – it WILL be exciting! If we get rejected then we can be a bit concerned but it is a 10% run so a little pullback is to be expected.
DV
- Oct $35 calls at $5.80, now $12.10 – up 108%
- Feb $30/40 bull call spread at $5.50, now $7 – up 27%
- Feb $40 puts sold for $5, now $2.50 – up 50%
I'm proud of this one as it's the kind of play we should always aspire to look for. The sector was beaten down severely and, as I said back in the original post, DeVry is NOT like all these BS diploma mills, they've been around since the 30s and are a highly respected institution. Obviously the October calls are a stop-out if they fall to 100% or if the market looks week. The Feb combo is a nice net entry at $40.50 so no need to worry unless they blow $45.
TXT – We're rolling the dice on this one as we don't know where the military end of the budget ax will fall. They popped 10% off our entry and are looking strong over the 200 dma at $20.15 so that is going to be our watch line.
- Jan $16 puts sold for $1.20, now .53 – up 56%
- Jan $16/19 bull call spread at $1.70, now $2.20 – up 29%
- 2012 buy/write at $10.20/12.60 – on target
I was super-bullish on these guys at $18.40 and I still like them at $20.74 so the spread stays. Notice in the original post I had 3 different ways of doing that $16 put sale as a net $14.80 entry was just silly. I even suggested selling 2x the $16 puts to overpay for the spread – that one worked out great!
All in all, a very good set of picks and I've been thinking of putting up some short plays for October but I want to see what's what in the week ahead as we can still go either way and we're certainly bearish enough in our covers. There's a reason I only do posts like this once in a while – I like to do them when the results are likely to be like these!
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