New Trade Ideas: Getting Technical on Fundamentals

I have had some trouble looking for new trade ideas this week. My recent go-to's have become less opportunistic, except Green Mountain (GMCR), which I have traded the bleed-out since 4/3 (GMCR -14.34% since The "go short" call).

In an earlier WR I stated that "It will take another week or so to determine if this is a short term reshuffling or change in market direction," or something along those lines. Obviously my views have been that what's happening is a change in market direction. So let's do some pairs trading! I.E., a convergence of the Russel 2000 (RUT, IWM) index of small caps and the NASDAQ (NDX, QQQ, IBB) index to the trend of the S&P 500.

Since this is a bit technical, I'll leave it to these guys to outline the details:

• Russel 2000 Trading at 102x trailing EPS
• Momo's Crashing like it's 2000
• Russel 2000 Dangling Above 200MA

The trade though is pretty simple. Go short names like IBB, IWM, and QQQ.

April 25 Weekend Review

Bflakaz Weekend Review

April 26, 2014

Recap of Previous Week's Trades

• NFLX short put spread (3) sold @ 2.15, covered @ .20, Profit = $585
• GMCR short 150 shares @ 99.21, covered @ 94, Profit = $781

Management of Current Trades

There are no current positions.

Trade Setups for the Upcoming Week

First, let's recap what happened on Friday. The NASDAQ once again had a bloody day, dropping 1.75% due to poor Amazon.com (AMZN) forecasts for current quarter results, despite having a good Q1 2014, and more rumblings in Ukraine. Among the heaviest hit were AMZN, NFLX, FB, TWTR, Z, and SCTY.

NFLX I've been over time and time again. I truly cannot believe how weak this stock is. AMZN, FB, TWTR, Z, and SCTY are all overpriced growth names (or momos) and are taking a beating due to investors waking up and smelling the roses. The cheap money days are coming to an end. It's healthy for the market overall for these over valued names to take a hit; it means that investors are actually minding fundamental values. After all, despite the big drop in the NASDAQ, losses in the S&P 500 and Dow Jones were only 0.8%.

In the April 11 WR, I predicted that momos would continue to drop if there were bad news catalysts from earnings, geopolitical rumbles, etc. I also said that value dividend names would become more attractive and would probably see a bounce sooner and/or a more gradual fall. Unfortunately, I didn't trade upon this. That's not a stupid move, though, seeing as volatility is increasing and many of the momos reported earnings that could have sent them in either direction.

The time to trade these names again will be after earnings season. IV needs to drop. Then I can pick up some longer out call spreads for cheap, and watch a reversal. Many of the momos have reported good quarterly results, but they are still seen as over valued. Therefore, as they continue to sell off, valuations will become more attractive, and buyers may finally tip-toe in. Calling a bottom is tough to do though, as shown by me trying to call the bottom in NFLX for weeks now.

I will not be trading this week, only watching and planning for the next leg.

Some Side Notes

AAPL, in its earnings report this week, has decided to not only increase its stock buyback program to $130 billion, but to also make a 7-1 split on the stock. At the closing price on Friday of 571.94, a 7-1 split would make AAPL trade at 81.71. While I think this makes a great opportunity for investors like myself, with AAPL having a P/E ratio of only 13.67 and a 2.3% dividend yield, it also will make on of my all time favorite trades damn near impossible.

AAPL options currently forecast a 1.3% - 1.85% move higher/lower, respectively. This is found by taking  ATM calls/puts from the front calendar contract (MAY14) and dividing by the share price. If these probabilities remain the same on AAPL after the split, then the price of the premiums for those ATM contracts becomes 1.06 and 1.51 for calls and puts rather than 7.50 and 10.60. This means that it will be impossible to collect any premium by selling OTM iron condors. I have never had a losing trade on AAPL, so this is a bit frustrating.

Trade of the Week

NFLX and GMCR

NFLX reported quarterly earnings on Monday after the closing bell. I had discussed in previous WR about playing said earnings with a short put spread, that is, selling IV with a Delta positive position. Came in at 11am on Monday and sold 3 contracts for 2.15 and flipped them the next day after the beat right after the open for 0.20, rendering a 90% return overnight for $585.

GMCR closed down on a wide rally day on Wednesday, and as I said in the last WR, I was looking for a short entry into GMCR once again. Well this was it. The next day, famous Hedge Fund short seller David Einhorn announced that he was still short GMCR and the thing tanked -4.5%. I guess I got a little lucky, but I covered at 94 for a quick $781.

It's worth noting that many trades I have been making have been very short in duration. Why? This is 2014, not 2013, you can't leave your profits on the table. Here's NFLX

Flies up after earnings to 380 and the next 3 days it sells off. That's what I call volatility.

NFLX Earnings Beat pt 2

NFLX up 9% to 380 and position closed. BOT 3 NFLX April 25-14 340/345 put spread @ .20.
Profit = $585

That's the power of a conviction trade!

NFLX Earnings Beat!

NFLX reported earnings just after 4pm today, announcing to raise prices for new customers by $1-$2.
For all the deets, go here http://www.businessinsider.com/netflix-earnings-2014-4

Here's the trade put on at 11am this mornings: SELL 3 NFLX April 25-14 340/345 put spread @ 2.15

NFLX is up to 371 and change after hours, and volatility will be hammered tomorrow morning when I plan to sell this back to the market! Should be a pretty solid win. Max risk =  $855, max reward = $645.

April 17 Weekend Review

Bflakaz Weekend Review

April 20, 2014

Happy Easter!

Recap of Previous Week's Trades

There were no trades put on last week.

Management of Current Trades

There are no current positions.

Trade Setups for the Upcoming Week

NFLX

Looking at this chart, it appears that NFLX has bottomed. Over the course of a month it has made a full parabolic move. But can it rip higher? When bringing up a 2 year chart, it appears so based solely on technicals; NFLX is HUGELY ovresold. But is there a good fundamental reason NFLX is selling off? Not in terms of the company's fundamentals, but fundamentals in its stock valuation. NFLX still has a P/E ration of 187, but that has come down tremendously amid this sell off.

The only way NFLX can rip higher is if it has a truly break out quarter and blows analysts' predictions out of the water, which is unlikely to happen. NFLX subscriber growth has peaked domestically at around 40 million. They plan to crack down on account sharing and have toyed with raising prices. In my view, this is bad for the company, but investors will be pleased. If a price hike is included in the earnings report, out after the closing bell on Monday, then NFLX will go higher. 

I'd think it will be a normal earnings report, I.E. a non-breakout quarter with no price hike news, but I wouldn't rule out the possibility of those happening. So, the trade would be to sell a put spread as close to a 1:1 R/R as possible, that way a move up and a non move in NFLX are profitable, since the premium is being sold. That also means a down move post earnings will have its negative affect on the trade dampened since IV will be crushed.

AAPL

AAPL also has earnings this week, 4/23. Therefore I will be a premium seller here in order to take advantage of the higher IV and then the IV crush post earnings. Iron condor with a tight range, maybe Delta of .4/-.4 or close to that.

I've tried to play earnings reports in the past... some went VERY well and others GOD AWFUL bad. When I first started trading options over a year ago, I bought an strangle on NFLX the day of the earnings report, not understanding IV, and got a lucky 90% return for $2250. Then when I learned how IV worked, I put on an iron condor on facebook (FB) hoping for a non-news quarter and got rocked, because this was FB's breakout quarter where it rose 30% overnight, and I was on the opposite side, losing $2200, my biggest loss to date. Hell, even recently, GRPN reported earnings about 2 months ago and I bought some OTM calls. After the ER it flew higher... and then collapsed. I lost all of my $180. The problem with ER bets is that you can't manage your losses, they're immediate and, most of the time, huge. Therefore, if I choose to play these, I will be cutting my risk waaaaay down and only looking to make a couple hundred bucks, max.

Some Side Notes

The power of the watch list. Just because you've exited one trade in a name doesn't mean you can never trade it again, or better, in the near future. It makes no sense to trade every swing, but when you make a forecast, and those catalysts for the forecasts are met, then show your conviction and trade it. In this case, I'm talking about DDD and GILD.

DDD took a -15% plummet recently, and I had called it several weeks before in a weekend review. Remember this chart from the March 22 Weekend Review?

Well how does it look now?

In the 3/22 WR I said that short target would be 45-40 if DDD broke down below the neckline on the head & shoulders. OOOOOH look at that! Too bad I COMPLETELY missed it!! >:(

How about GILD? In the 3/22 WR I said to look for a bounce from 200MA. I successfully traded that bounce once, but missed the second one days later that was bigger than the first!

The blue arrow was the entry of my trade and the green arrow is where a second entry could have been made from 68 to 74.XX... damn!

Don't ever remove conviction forecasts and very opportunistic trades from your watch list!!!

4/16 Market View Update

This week (so far) has proven interesting. The market has rallied back almost to where it was pre-sell off. SPX is back at 1862, after rallying 2.4% in 3 days.

Here are some of the points I made about the market over the weekend.

• SPX would bounce Monday (correct)
• Trading would be choppy (correct)
• Volatility (as measured by the VIX) would rise (incorrect)
• Need a good catalyst to turn market around (correct, http://www.bloomberg.com/news/2014-04-16/u-s-stock-index-futures-climb-as-yahoo-jumps-on-earnings.html)
• Value/Dividend over Momos (correct, http://blogs.marketwatch.com/thetell/2014/04/14/sp-500-will-recover-not-so-much-with-momentum-stocks-goldman-sachs/
• Overall correction to 1800 and then 200MA (to be determined)

Although this has been a nice little rally, that I missed out on by not placing any bounce play trades, I still think the overall direction is down over the next couple months. This happened last Tuesday and Wednesday too before the markets careened downwards that Thursday and Friday. Because of the recent catalysts mentioned in the article above, I think it is more likely that the market pauses here rather than has another leg up or down. More news is needed to move us big in either direction, since the technicals have recovered to a degree.

I think that BIG catalyst to move the market, especially the momos, will be NFLX earnings on April 21. This stock has sold off -22% in a month. It's been beat to hell and back and is ripe for a sharp move higher. Of course, since this stems from earnings, it could also drop the bottom out of NFLX.

Right now is not an opportunistic time to be trading the markets: things could go either way... or both ways in the course of a day, like Tuesday. I'm still looking for another short entry on GMCR for the rest of this week and into next week, but that's about it.

April 11 Weekend Review

Bflakaz Weekend Review

April 12, 2014

Recap of Previous Week's Trades

STX: Short 200 shares @ 56, covered 54.54 = $292 profit

GMCR: Sold 5 APR14 110 calls @ 1.00, covered 0.56 = $220 profit

SPX: Bought 1 1825 MAY14 put @ 16.50, closed @ 30 = $1350 profit

GMCR: Sold 5 105 APR14 calls @ 2.00, covered @ 0.60 = $700 profit

QQQ: Short 175 shares @ 87.68, covered @ 84.40 = $574 profit

Management of Current Trades

There are no current positions.

Trade Setups for the Upcoming Week

Let's start this week with a little bit of a broader market outlook, rather than in individual stocks. The indices (SPX, NDX, DJIA) have all taken a beating this past week, and it appears that this "long awaited" correction that everyone has been warning of since 2012 is coming. Traders and investors are finally realizing that 2014 is not 2013; you can't just buy the dips and watch the market scream higher. With the end of QE possibly on its way, interest rates will also rise, and nobody really knows if the economy can handle that. Well, the economy can't take higher rates, but that's another topic of discussion. Right now what's getting hammered the most is the inflated NASDAQ. P/E ratios are very high in names that actually turn a profit, and Price:Sales ratios are extravagant in names that make no profit at all! It's all reminiscent of what happened in the NASDAQ in 1999/2000, although I don't think that level of pump and dump is going to happen.

Now, what I'm expecting in the coming weeks are choppy trading, increase in volatility (VIX), and an overall downtrend correction; buying dips and selling rips, lower lows and lower highs. To turn the market around at this point would require a big time catalyst: earnings of a bell-weather companies beating estimates and offering solid outlook, better economic data, news from the Fed, etc. That being said, let's look at a short term chart of the S&P 500 (SPX)

Going in to Monday I think we'll see a bounce based on that huge oversold candle on Friday. The whole thing is basically outside that bottom bollinger band. Friday was just a fear sell off day as investors were probably readjusting portfolios and whatnot. But here's why I think THIS is the 'big' correction everyone's been waiting for:

As I've said before, trend lines aren't the most accurate of technical tools, but they let you get the gist of it. Next stop for SPX will be around 1800, with a continued slide to the 200MA, which hasn't been touched since 2012. A retreat to there from the all time high of 1897 would be a -7.31% pullback, which I'd consider a correction. The NASDAQ is already within striking distance of the 200MA, and if that's broken, then the bottom just might fall out if there's a bad news catalyst.

Bottom Line: The market is going lower in the short term. When this passes, as it always does, I think investors will be hungrier for conservative dividend names over momos. The hot money is flying out of names like TSLA, NFLX, GOOG(L), PCLN, IBB, etc, and the momentum is completely gone. Investors will be weighing the Fed's decisions over all else as we chug through 2014. I think this correction will finally knock some sense into this frothy market. In addition, it's worth noting that even though the Fed has been tapering its bond purchases, the Treasury market has remained calm. I expect that to change soon.

Trade of the Week

SPX

I mentioned on Monday that the OI in MAY14 1825 puts on the SPX was rather high, and that a move to the 100MA (1825ish) was probably coming. During that unjustified non-news Fed rally after 2pm on Wednesday, I went with my gut and decided to buy a put at the 1825 strike, as well as go short GMCR and QQQ. What a day Thursday! Buy for $1,650 and sell for $3,000 the next day for an 82% gain overnight.

Every time you make a great trade, it's like an entire stadium is cheering for you, but only you can hear it. Lately I've been hearing a lot of that applause!

Profits:

• Week 1 (March 22): $1,144 (AAPL, Z)
• Week 2 (March 28): $6,424 (NFLX, GILD, DDD, TWTR)
• Week 3 (April 4): $3,136 (STX, SPX, GMCRx2, QQQ)

Total = $10,704

Thursday's 40 Point Meltdown

An update on positions:

• SPX: Bought 1 1825 MAY14 put @ 16.50, closed @ 30 = $1350
• GMCR: Sold 5 105 APR14 calls @ 2.00, closed @ 0.60 = $700

Big gambles can have big payoffs, and fortunately this is what happened today. I was cynical as to the merits of yesterday's rally after the Fed minutes were released at 2pm. I saw it as unjustified and that the rally would definitely be sold into today. I commented on Monday that there is HUGE open interest in the MAY14 SPX 1825 puts, so I decided to jump in with them and be a contrarian to the rally. Looks like it payed off nicely.

Same goes for GMCR. 105 is the resistance and I was confidant that it would break the 50MA soon. So yesterday, at the same time I bought the SPX puts, I sold some GMCR calls. Look what happened.

It's important to note that these positions I have been taking recently are MUCH larger than what I have put on in the past. As time has passed, I've become better and more confident in my trading, and I'm subscribing to the notion of, "When the going's good, BET MORE!" philosophy. I've been on something of a hot streak lately, but all streaks do come to an end. No one can ever be correct 100% of the time, and even I haven't been recently. Before I started this blog, I lost money in NFLX, TSLA, GRPN, and HLF. What's important to remember is this: It's not about being right or wrong, it's about how you manage being right or wrong.

You can be wrong 7/10 times, but if you manage your losses and make them small, you can still be profitable with the 3/10 winners. Managing winners is equally as important; take profits off the table. YOU ONLY EAT WHAT YOU KILL. When the going gets tough for me, I'll reduce position sizes significantly. The point of this blog isn't to show off 'how good I am:' I'm only an intermediate trader. The point is to record thought processes and log winners AND losers, and to also get people interested in the markets. The world's most lucrative industry lies waiting at your fingertips if you choose to study and learn how they function, and that has been proved in my case especially over the past 6 months.

Monday Morning Frenzy!!!

An update on positions:

• STX: Short 200 shares @ 56, covered 54.54 = $292 profit
• GMCR: Sold 5 APR14 110 calls @ 1.00, covered 0.56 = $220 profit

Stayed away from LEN AAPL NFLX this morning. LEN and AAPL both shot down immediately and it doesn't look like the 200MA is going to provide a bounce for NFLX, given current market conditions. This morning has been another bloodbath, just like Frida afternoon.

Didn't make an option trade on STX, didn't have enough time to analyze one so I just went old school and shorted 200 shares on margin. GMCR went up a little this morning so I waited and sold some short term calls for $1.00, bought them back a little bit ago at $0.56. Still looking to go short GMCR as the bottom bollinger is holding, just like I thought it might, but I still think it plows through sometime this week. Might just short shares or sell a call spread with expiration a little further out.

I think the long play on LEN isn't there anymore. AAPL iron condor maybe, need a little more time to see what happens because it's getting hit today. NFLX, you have both given and taken from me... I'll pass.

Honestly maybe I should just grab some popcorn and wait for this market move to play out. Don't want to give everything back to the market. I wasn't as aggressive as I should have been this morning, but oh well.

April 4 Weekend Review

Bflakaz Weekend Review

April 5, 2014

Recap of Previous Week's Trades

There were no trades put on last week.

Management of Current Trades

There are no current positions.

Trade Setups for the Upcoming Week

GMCR

When I posted this idea earlier in the week, I was waiting to go long off support from the 50MA. Well things got ugly Friday after the jobs data and GMCR closed well below the 50MA. Now I'm looking to go short this stock next week. The bottom Bollinger band may provide some support, but I think it will get plowed through. Short target at the 100MA @ 88.88, but this will probably continue to sell off to the 200MA and fill the gap afterwards.

LEN

LEN wanted to fly higher on Friday but the market at-large eventually brought this thing back to close slightly lower on the day. We were talking up 2.5% that continued to wane down as the day went on. This thing wants to go higher; it blew through the 50MA resistance. Bullish cross on MACD is a buy signal. Looking to go long JUN13 calls next week.

STX

STX, like LEN, also wanted to go higher on Friday, but the tech sell off hit this name hard, closing down over 2%. I'm doubting that there will be a bullish engulf on Monday, but I'm not certain about a short play either. The opportunity here comes after it closes above that gap fill resistance. It's on the radar.

AAPL

Friday's tech sell off even hit "Tech Utilities" like AAPL on Friday, which is good for me. AAPL is right back into that 'goldilocks' zone of around 530, which means an iron condor spread could be a potential money maker. I haven't chosen the strikes yet, but I'll be searching for strikes with a Delta of at most .25/-.25 to make the trade.

NFLX

NFLX again?! Yes, again. The bearish sentiment in this name hasn't been this bad since the great sell-off of 2011, when NFLX fell from its previous highs of $300 all the way to $50 in just a few months. Times have changed, and NFLX is twice the company it was then. The fundamentals are much sounder... in the near term. Problems down the road? Yes. For now, my eye is on the 200MA - the make or break point of inflection. The trade opportunity here is an earnings play. Buying some calls in an anticipation for this thing to fly higher and flush shorts after earnings is what I may plan to do. April 21 is earnings, a profit of 0.81 per share is expected.

Some Side Notes

The second quarter has ended, so now it's time for earnings season. Here are some dates:

1. GMCR: May 5, 0.95
2. LEN: June 23, 0.52
3. STX: April 29, 1.25
4. AAPL: April 23, 10.44
5. NFLX: April 21, 0.81

The market at-large I think will steadily drift higher even though QE is coming to an end. It takes time for a change in monetary policy to hit markets, at least a few months. With the end of QE on the horizon, many over-vauled momo names will come back to earth in terms of P/E multiples. Safe, dividend paying names will become priority, but finding low P/E names in a broadly over-valued market will be tough. As a result, the indices are likely to take a hit in the coming months, probably in the Summer.

Trade Ideas 4/3/14

GMCR: Approaching the 50MA @ 105.18, support at 105 since the big gap up. Waiting for support confirmation before going long... gaps have been getting filled lately.

STX: Hitting resistance at the gap fill, waiting for confirmation of resistance or breakout. With the current flight to value and old tech, I'd rather go long than short.

LEN: Running into resistance here just above 40 at the 50ma. Trend line broken and now might prove resistance, trend lines aren't the most exact measures. Confirmed breakout means go long!

NFLX: Once again looking at this. The short trade looks to be running out of steam, 350-360 area has been holding up. But the gap hasn't quite been filled yet, and the 200MA has yet to be touched. S&P 500 made an all time high this week, maybe this sell off has made its run. Will not go long until a close above 100MA at 384.

A Note on High Frequency Trading (HFT)

To start, High-Frequency Trading is nothing more than day trading with huge margin and much faster speeds. HFTs are looking for a tick of a penny (or fraction of a penny) before profits are made. Many HFT firms have become very important market makers, i.e. provide liquidity. When you want to sell or buy, now you can get the price you want and in less than a second because of them.

Many people are outraged over that penny that they're making. This is capitalism. People will always find new ways to get around old technology and practices and then profit from them. The profits at first can sometimes be extraordinary, mainly because to do what is being done, the person had to really think outside the box. Eventually, the profit dissipates as more players enter that space. The same will happen with HFT.

The stock market, in this sense, is NOT rigged, most especially for small time investors and traders such as myself. People have a built-in bias many times for crazy new automated (and even more so "algorithmic") technology. In reality, HFT has done more to help small timers like myself. Bid-ask spreads are insignificant, there is a flush of liquidity, broker commission costs have plummeted, and, as with electronic trading in general, one doesn't have to buy a seat down at the exchange to trade!

The real outrage should be aimed at the Federal Reserve and Washington altogether. The Fed is currently in the process of manipulating financial markets so much that I fear a return to normalcy is long gone in the rear view mirror. This is an issue that I have personally researched and written on extensively, and maybe I'll throw some of it up at some point in the future when it is more relevant.

As for Michael Lewis's new book, Flash Boys, don't bother. Yes, Moneyball became a movie, The Blind Side became a movie. But his last book, The Big Short is wrong on so many levels about the financial crisis that honestly it's laughable.

Read, research, and decide for yourself.