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.