4 Long And Short Trades You Can Make Monday Morning

by: SA Editor Rocco Pendola

I picture a considerable number of Seeking Alpha readers spending Sunday with several forms of media. Pardon my presumptions, but I think many Seeking Alpha audience members read The New York Times on Sunday (the actual paper). Some catch up on the past week's editions of The Wall Street Journal and read the new Barron's. A few leaf through publications such as The Economist, Harvard Business Review and The New Yorker.

And, of course, you spend time on Sunday getting ready for the week with Seeking Alpha. I work almost constantly, yet, somehow, I spend a meaningful amount of time with my family and watch a bit too much hockey. I use a fair chunk of time on the weekend not only writing, but looking for ideas.

I use several resources to find option tidbits that can turn me on to potential trades. Seeking Alpha houses several of these resources. Exhibit A - the great Frederic Ruffy's daily column. On Friday, Ruffy spotlighted activity in Research in Motion (RIMM) options:

For the first time in over a year, shares of the BlackBerry-maker are up on profit news. The average post-earnings loss over the previous four quarters was 15.7%, including a 19% tumble on 9/16 and a 21.5% swoon on 6/17. Today, however, RIMM shareholders are enjoying a 4.4% post-earnings move higher and expiring weekly $15 calls are the most actives, with 9850 traded and about half the volume traded on the Bid. Apr 13 puts, Weekly 14 puts, Apr 15 calls, Weekly 14 calls and next week's 15 calls are seeing interest as well and levels of implied volatility in RIM options moved down 39 percent to 50; which is the lows of the year, but still well above the 52-week lows of 31 seen in April 2011.

I am not sure what to shoot down first - speculation in weekly calls or more ineptness at RIM. Unless you use weekly calls as part of a well-thought out and long-term plan, I really think you're best to stay away from them.

It stuns me that RIMM rose on another horrific quarterly report. I think my partner in lawfulness, Seeking Alpha contributor Robert Weinstein, still owes me a Canadian beer as the result of a bet we made on RIM's fate (or was it NFLX?). In any event, Bob and I work so well together on our options investing newsletter because we tend to see the world and investing from different perspectives, yet we agree enough that we do not kill one another. Here's Bob's take on RIM's latest pitiful display:

Sales fell 25% last quarter which independently may not be as bad as a one off type of event. But as a continuation of a string of results spiraling lower, one may fear RIM's sales may soon reach the "event horizon" (a term used to describe the point at which even light cannot escape from a black hole) and the wealth of the company crushed from its own weight. In an attempt to avoid getting too near the edge, Jim Balsillie stepped down from the board ...

With RIM trading with such intensive price movements, it makes perfect sense for me to look at options as the vehicle to make the most gains with the least amount of risk. I consider RIM first as a binary event investment (buyout or not), and secondly a recovery on its own. I believe CEO Heins is there to "sell the shop."

With this in mind I like a blend of several strike prices. First, selling covered calls with a look at the April $18. The premium is low, but a buyout is likely to move the price well above the current price and I would like to capture as much as I can. Secondly, a more conservative approach may be to sell the $15 or $16 strike price offering a lower risk profile and greater daily time decay with a downside of less potential gains. I will look for a pullback in price to position a blend of both strategies.

Now, while I would not touch RIMM, on either side of the trade at the moment, I will say that if you're going to play it at all, Bob has the right idea, even if you're bullish. I dislike banking on a buyout, particularly when the Canadian government might balk at any talk of a foreign entity taking over RIM. Don't get me wrong, if I was a member of Parliament, I would be drafting an impassioned speech right now, requesting that we respectfully ask RIM to leave, but I don't think that's going to happen.

So, if you are long or feel the need to get long RIMM, get short at the same time. Bob's strategy makes perfect sense - wait for a pullback and sell some $15 to $18 call contracts. Sure, if RIMM runs, you've capped your gains. But does anybody in his or her right mind see this thing moving out of the teens anytime soon?

Also on Friday, Ruffy highlighted increased (and bullish) options activity in Sirius XM (SIRI):

The top trade is a 9600-lot of Jan 2 calls for 49 cents on PHLX when the market was 44 to 49 cents. 10,209 now traded against 137,400 in open interest, which is by far the largest open position in the satellite radio operator. Apr 2.5. May 2.5. and Jun 2 calls on SIRI are seeing early interest as well and levels of implied volatility edged up 4.5% to 40. No news. The stock is set to end of the first quarter with a 26.4 percent advance and today's order flow seems to reflect expectations for additional gains in the second.

Ahh, but there was news. And Seeking Alpha was all over it.

It's tough to trade this news when you're uncertain of Liberty Media (LMCA) top dog John Malone's motives. But, plenty of people obviously did. If they did it on the feeling that Liberty wants to take over Sirius XM, I am on board with that sentiment. Liberty gets it. The company understands - and is relatively well-positioned to capitalize on - the multi-platform direction new media is headed in and I think it can do a better job of taking Sirius XM to the next level than the current regime can.

While I would not necessarily make this play, assuming a trader purchased those January $2 calls, I like the idea. If you're bullish, it makes perfect sense to go ITM as opposed to letting the lower price tag on the $2.50 and $3.00 OTM calls draw you in. Of course, some folks are buying $2.50s and other OTM contracts. It's a misnomer, however, that you're somehow more bullish or more aggressive by going OTM. All you're doing, as I see it, is increasing the chances that, if you're wrong, you walk away from the trade with nothing (a worthless option contract). With the ITM call, unless SIRI completely implodes (and does so fast), you have some intrinsic value to hang your hat on.

Because he had some good stuff on Friday, we might as well stick with Ruffy:

The stock suffered a one-day 30% skid on January 31 after lowering its fourth quarter profit forecast and has failed to stage any meaningful rally attempts since that time. Today's options order flow seems to reflect concerns that the stock will fall below the intraday 52-week lows of $6.14 set yesterday and south of $6 per share, as Apr and May 6 puts are the most actives in the electronics retailer today.

The sad stock he was referring to - Radio hack (RSH). While not quite to the level of RIMM and Netflix (NFLX) in 2011, I feel like RSH and Best Buy (BBY) represent two stocks to short into the ground, except I would not directly short them. Instead, I would consider using puts.

The other day I wrote an article detailing what a seemingly impossible position new J.C. Penney (JCP) CEO Ron Johnson finds himself in. You should all watch Johnson's presentation to JCP investors. He comes off not only as a generally likable guy, but as a smart and ambitious one as well. While it was very cool to hear him take you behind the scenes at Apple (AAPL) (like when he discussed going to Steve Jobs' house to tell him he was quitting), I also cringed when he compared JCP and Target (TGT) to Apple.

Essentially, Johnson will need to tear apart the entire notion of what brick and mortar retail is - department store or otherwise - and remake it. Frankly, I think it's an impossible task. That said, if anybody can do it, he can. I don't think he will, but I would put more faith in Johnson proving me wrong than I would RSH or BBY management.

Smaller stores, closing stores and staff reductions will not cut it. These moves should scare the living heck out of investors. It's really all very NFLX. These are not good signs. Rather, they are harbingers of things to come. When Reed Hastings yelps about becoming the next HBO or making Netflix a la carte in your cable package, the stock jumps. That's nonsensical. These moves should make you bearish because they indicate that the current business model stinks and we really have no unique and innovative ways to turn the ship around so we'll do what's been done before. And, really, what's been done before rarely works out.

The same narrative continues to play itself out in retail where you will likely not make it unless:

  • You're Amazon.com (AMZN) or a handful of other mostly or all online retailers.
  • You're Apple. Enough said.
  • You're a high end and/or luxury brand.
  • You own a local store in a city like Manhattan or San Francisco.

Companies like RadioShack and Best Buy continue to pull the same old rabbits out of the same old sweaty and disgusting hats. So, if I were to play RSH and BBY, and I might, I would do it with put options. Next week, I will see how things shake out and consider allocating 80% of capital for these trades to ITM January 2014 puts and the remainder to less-prudent January 2014 and closer-in OTM plays.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in BBY, RSH over the next 72 hours.

Additional disclosure: I am long NFLX June $40 put options.