Using Friday's Options Activity To Get Ready For Monday's Market (Part Two)

by: Rocco Pendola

>>>Return to Part One

Because it deals almost solely in options, I like to take this opportunity most Fridays to update the $10,000 portfolio's positions at week's end. It also makes sense to review things because these trades represent my relatively long-term sentiment on each company. As such, it might not be wise to look at Friday's performance and enter a trade on Monday.

Option Quantity Entry Price Midpoint Price, Friday's Close Profit/Loss
Apple (NASDAQ:AAPL) April 2012 $450 call 1 $19.18 $17.93 - $125 (NASDAQ:AMZN) April 2012 $220 call 1 $30.00 $22.60 - $740
Research in Motion (RIMM) March 2012 $20 put 30 $2.70 $2.85 + $450
Sirius XM (NASDAQ:SIRI) March 2012 $3 put 25 $1.58 $1.20 - $950
PowerShares QQQ ETF Trust (NASDAQ:QQQ) March 2012 $50 call 1 $6.68 $10.00 + $332
Netflix (NASDAQ:NFLX) June 2012 $50 put 8 $4.50 $3.90 - $480
Pandora (NYSE:P) June 2012 $15 call 9 $2.55 $2.40 - $135
TOTAL P/L - $1,648

That puts the value of the $10,000 portfolio at $21,883. Still a double by a somewhat comfortable margin.

At day's end, the minute-to-minute fluctuations of the positions in this portfolio mean very little. Each will tear one way or the other once the dust settles after earnings. I do think momentum and their general strength as companies could lead both AAPL and AMZN much higher ahead of what will be their holiday quarter reports come 2012.

With that in mind, I would be more than comfortable entering the AAPL, AMZN, RIMM, QQQ and P trades first thing Monday morning. I don't see much point in worrying about current prices. The forthcoming catalysts will tell the tale on these trades more than the day-to-day fits and starts. First up, of course, is Pandora's November 17th earnings report followed by RIM's on December 15th (or thereabouts).

A quick aside on Amazon. The stock is not a good long-term short. It never was. And, for the foreseeable future, it will not be. Like I have been saying since NFLX crashed below $100, you cannot pull short calls out of the sky. Almost all AMZN bears I have come across have not looked deep into the company's business. And this becomes crystal clear when you read their flimsy, poorly-researched "cases."

On the flip side, fellow Seeking Alpha contributor Marc Gerstein provides an excellent look at Amazon's business, dispelling several weak claims from "cyber critics" that have made their way through the echo chamber.

The two wildcards here are the SIRI and NFLX plays. Let's start with NFLX. I probably pulled the trigger a bit too quickly on that trade, but I'm comfortable with it. I underestimated the irrationality of the people who invest in the stock market. It's shocking to me that any Netflix defenders remain, but they're out there. This dead cat bounce does not surprise me. In fact, I think it could sustain to the $85-$90 range and maybe higher if Reed Hastings pulls a few fluff PRs out of his pocket.

That said, my only regret is not having more "cash" in this account to make the position larger as this soft and misguided move up plays itself out. I noted that I am kicking myself for not having made money on my NFLX prediction. At times, I owned NFLX puts and took small losses alongside one small profit. I got scared out of a position as the stock soared to $300. I cannot let that happen this time around.

If you read Netflix's just-released 10-Q, you should be more confident than ever in a short position. Finally, the company is telling you what many of us have known all year - their business model is tenuous at best. I made assumptions about Netflix's business back in April, but, today, most of what a Netflix bear says represents a reflection of reality. It's just a sin that the SEC did not make Netflix act with more transparency before the house of cards fell down.

Bottom line - if you're going to buy puts on NFLX, it probably would not hurt much to wait. In fact, I don't think you'll miss what I'll just call the after-party if you wait until 2012. Netflix reports earnings again in late January. Who knows what type of dog-and-pony show they'll have in store for us then?

While I fully expect the company to have no choice but to guide 2012 toward full implosion, nothing would shock me from this lot. I would tread carefully, entering a small position ahead of the next report and then adding to it shortly thereafter as the losses actually start hitting the books throughout 2012. Of course, I am being conservative here. Q4 could quite easily be a bigger disaster than Q3 was.

As for Sirius XM, it reports before the bell this coming Tuesday. CEO Mel Karmazin has a way of talking his stock (unintentionally, I think) up during conference calls. Plus, I would not be shocked if the company beats some estimates by a smidge. In any case, one of two things happens after earnings.

One, the stock rises post-earnings. It hits a ceiling like it always does and then implodes. Two, the stock stagnates post-earnings and begins a gradual descent back toward and below $1.50. In any case, the question will become when do you short the stock or open a long put position, not if. I cannot answer that now, but I think sometime in the immediate aftermath of earnings, it will be game on.

If the stock drops on earnings, I don't see meaningful support coming in until below $1.50 so there will be time to get on board. The scenario I absolutely do not see playing out is the stock holding any meaningful gains for too long after earnings.

Here's the "why" of it all. If Sirius XM can learn anything from Netflix, it's that subscriber growth ultimately stalls. Even without Netflix's much-publicized missteps, its domestic sub numbers were about to hit a wall. When you think of consumers making the shift from one delivery mode to another or adding a delivery mode, the move from terrestrial radio to satellite radio has been anything but dynamic. In fact, there really has not been much of a move to speak of.

First off, satellite radio still commands a puny and stagnant market share against terrestrial radio. The numbers do not lie. And adopting satellite radio does not mean you abandon everything else. If you recall, satellite radio was supposed to render terrestrial obsolete. That never happened and it shows no signs that, all of a sudden, 10 years later, it will. Certainly, Internet radio has been much more disruptive.

That reality aside, Sirius XM has done virtually nothing to generate meaningful revenue streams beyond what it gets from subscriptions. While adherence to the subscription model makes them a nice, niche company, investors have come to realize that the relatively slow-growth that it triggers - and the risk of subscription growth slowing, stalling or reversing - makes the stock dead money. Simply put, business models without synergy and diversification of revenues make investors worry, as they should.

As such, the stock gets treated like a toy by traders. The only value that remains in SIRI is that you can trade it back and forth. Other than that, it receives buzz primarily because you have three types of "investors" pumping the stock.

Bagholders, unfortunately, represent the first type and they're stuck. They bought this thing all the way up and have shockingly high cost bases. Longs who hope to live the penny stock dream make up the second type. They saw people get rich off of SIRI's run from a nickel. And, as emotion would have it, they expect - or hope upon hope - that the same sort of meteoric rise will repeat itself. (Guess what? That rarely happens). People who made massive profits by taking a leap of faith on a near-bankrupt company comprise the third group. I doubt many of them hang around much, but I am sure more than a few exist who keep a token position out of a debt of gratitude and try as hard as they can to pump the stock for the benefit of types one and two. All three types, like some Netflix longs/consumers, have an undying love for the product. That admiration for a service does not always equate to business models that portend forever-rising stock prices.

In any event, I wish I had purchased SIRI at a nickel or thereabouts. I make no bones about that. There's no way, however, given the reality of the way Sirius XM positions itself in the broad audio entertainment space, that I will touch the stock for a long play at the levels it trades at now, let alone higher, except for a day or swing trade.

Disclosure: I am long P.