Bearish Picks

Even though we seem to be well on our way to 12,750, there are several nice bearish setups out there.  Should we take a ‘dip’ tomorrow, I will be looking to the following to ‘bank coin‘ on the short side:

SYNTHETICS: Calgon Carbon – [[CCC]]

RESTAURANTS: Chipotle – [[CMG]]

SCIENCE & TECH.: FLIR Systems – [[FLIR]]

RETAIL: Volcom – [[VLCM]]

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A nice consolidation day for the bulls.  I don’t have much to offer in terms of analysis, so don’t forget to read The Fly’s comments, as well as Woodshedder’s technical take.

I’m slowly putting more my account balance to work…so in addition to the already discussed trade in [[SEED]], I opened a couple more positions:

• Long calls in [[EOG]] – it’s holding $112-113 range support, which also completes the consolidation from its recent breakout.
• Opened a strangle in [[FINL]]-(h/t to RC).
  • Wasn’t going to touch it until I saw comparatively very high open interest numbers for May calls.  With the stock trading right around $5, took a dip in May 5.00 Calls, purchasing extremely cheap insurance at the same time with May 2.50 Puts (thus creating the strangle).
  • This is somewhat of a gamble, so the whole position is assumed as the standard 2% risk.

DP Sells (at market-close):

• Started unwinding [[CSUN]] strangle & [[SEED]] straddle.
  • Both went on a tear during the day (pre-earnings hope?), so I closed out enough calls to guarantee, at worst, a break-even in the positions.
  • Whatever happens from now on is pure profit, with zero risk.
  • Both companies report earnings tomorrow pre-market.

Once these trades are fully closed out, I will post an ‘anatomy of a trade‘-type article to walk through a straddle/strangle from start-to-finish, with a concrete example.

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Bought [[SEED]] Apr 5.00 straddle this morning (h/t: Ragin’ Cajun); sold half the calls (+400% on the day) at market close to lock in a break-even for the position.

Now playing the earnings-game with just the house’s money. Dy-no-mite!

[youtube:http://www.youtube.com/watch?v=LkXKT1FQESI 450 300]

Took similar action with the [[CSUN]] strangle (earnings tomorrow morning). Full update later tonight.

UPDATE:  SEED earnings are out. Immediate reaction has been positive. Conference call tomorrow morning.

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– What about the maid?
– The maid?
– Was he jealous of her, too? He strangled her.
– It’s possible that his intended victim was a man and he made a mistake.
– A mistake? In a nudist camp?
– Nobody’s perfect.

The above quote, while funny, really has nothing to do with this post. But, it does use of the word ‘strangle’, which is a topic of discussion, and contains a valid reason for using it: ‘nobody’s perfect’…so here are a couple strategies that have built-in protection for those not-so-perfect days. So unless you are able to perfectly predict market/stock direction (in which case, why aren’t you on CNBC? /note sarcasm), read on.

I wrote about the short straddle not too long ago…flip that upside down for a long straddle; and the long strangle is very similar to that strategy. Both rely on large price swings and increasing volatility of the underlying stock. Profits are gained from a big move, up or down.

They both consist of buying a call & a put of the same expiration. However, while a straddle also uses the same strike price, a strangle involves a higher strike for the call and a lower one for the put. As a result, a strangle has greater leverage and lower cost, but at the price of increased risk.

While both strategies have a predefined cost (the total of the premiums + fees), a straddle is only worthless when the underlying equals the strike price. The strangle is worthless when the stock’s price is between the call and the put price:

The breakeven points for both include the cost of commisions/fees.

Personally, I prefer long straddles… I like the lower inherent risk and the quicker profits. However, strangles are just as useful, and they come at a lower cost & greater leverage.

I have also found strangles to work better on cheaper stocks, or when the underlying stock’s price is in-between strike prices. This is the reason I went with a strangle on [[CSUN]] ahead of their earnings.

There is of course no reason you can’t buy a straddle on a stock that’s not near a strike price (or vice-a-versa)…but with a strangle, you don’t have to decide whether to buy it above or below the stock’s price. So if the time is right and the stock is not near a strike price, I will generally go with a strangle (yes, I’m simple like that).

The key for either of the two strategies is to pick a stock that will move. Low volatility stocks need not apply. China & the solars generally provide good targets, especially just ahead of earnings.

UPDATE: An excellent straddle opportunity from RC, in [[SEED]] today – earnings after market close. Currently trading right around $5.

UPDATE of the UPDATE:  SEED is ripping, up 30%!  Will consider selling part of the position at the close to protect profits.

UPDATE II: More from RC. Check out the open interest in [[FINL]] May 2.50 & 5.00 Calls compared to other months! Care to speculate on a buyout?

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As I wrote last night, I had no good feel on which direction the market was heading…but the pre-market was decidedly bullish (on more [[BSC]] shenanigans), so I jumped in on the long side with several calls and 1 strangle.  Here be the details:

• Calls in [[CMED]] – support @ $37 is holding.
  • I had half-a-mind to sell after their monster day (+9% on the heels of positive news), but decided to hold (with a trailing stop) as it looks to have room to run.
• Off of yesterday’s idea list:  calls in [[LIFC]], [[SWN]].
  • Missed out on [[GME]] when I put in a limit order instead of market.
• A strangle on [[CSUN]].
  • Low-risk; looking to take advantage of the usual volatility inherent in the name.
  • Betting on the long-side with 7.50 calls, with 5.00 puts providing protection.
• And even lower risk (only 1%) position in [[MER]] Apr 30.0 puts.
  • You just never know…it’s got 25 days to kick the bucket and prove right all the speculators.

Didn’t sell anything; the account is still over 75% cash, so I can be plenty flexible come tomorrow…

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Having spent 99% of my weekend under a financial rock (aka. sport/March Madness/English Premiership), I don’t really have a good feel for what’s coming next in the markets.

So while I have perused my ‘basket of stocks’ tonight for trade ideas, my trades/actions will largely be determined by pre-market action/sentimentality. This is not hugely different from my usual plan (having pre-market set the tone for the positions that I open), but I may opt for more straddles/strangles tomorrow just to hedge my bets.

I only have 1 open position – [[KCI]] calls – so it would behoove me to put some more of the account balance to work.

Ideas/watched-list are as follows:

• Bullish reversals off candlesticks:
  • [[AMGN]]
  • [[SWN]] – also has support @ $60.
• Bearish:
  • [[AXP]]
  • [[CYMI]]
  • [[MGM]]
  • [[PALM]] – earnings came out below expectations on Thursday
  • [[STRA]]
• Bullish:
  • [[GME]] – support @ $50
  • [[LIFC]] – support ~ $39
• Other/Volatility:
  • [[CSUN]] – earnings come out Wednesday pre-market. Has been consolidating since huge drop in January; should be ready to move big.

Also, let’s not forget about [[MER]] and the suspicious put activity that’s been going on.  HUGE interest in the Apr 30. Puts!

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