Anatomy of an iPhone 6 Trade

In the wee hours of September 12th I woke up to pre-order the new iPhone.  I bought the 6 Plus (5.5 inch /64 gb space grey for moi, and a 6 regular 4.7 inch/64 gb silver for my wife).  Since I am not much of a line person, the early wake-up was preferred.  I was successful in securing the two phones for today’s delivery, but decided to buy a third, another 6 Plus for pure speculation.  Why you may ask? Well, media reports were fairly clear that the new larger Plus was going to be on short initial supply with potentially high demand as Apple enters into an entirely new smartphone (phablet) category.  Also, it became apparent of late that the new phones would be delayed in China, a very important growth region for Apple, but also a region where larger phones by competitors have been very popular.

My Order:


My Fill: I paid $400 for my iPhone 6 Plus (with upgrade pricing), I paid $600 for the iPhone 6 with no subsidy and paid $700 for the second iPhone 6 Plus.  So I am in for $1700 on three phones.  Two of the phones I intended to keep, and one for spec.

I have been checking in on the only real transparent marketplace for such items, EBAY, and had a good sense that the iPhone 6 Plus has been in demand:

So here was my trade.  This morning, I noticed that the line at one of Apple’s largest stores, in my neighborhood in the Meatpacking district in Manhattan, had the biggest line I have ever seen for an iPhone launch (I have walked by on all of the first morning launches).  The iPhone 6 Plus will sell out quickly, as it did on the line for the pre-orders.  With China still out of the picture, and lead times online suggesting 3 to 4 weeks, there is an Arbitrage opportunity.

I listed the second iPhone plus on EBAY with a Buy It Now option at $1500 (a level in and around where they have been trading the last couple days).  My $1500 offer got lifted within an hour of posting:


So the point of this post, obviously, was to brag about my quick $800 profit :-)  But most importantly it is to highlight the active gray market in new iPhones.  Oh and I just listed my iPhone 5S on EBAY, and given current trades, the 32 gbs have been trading between $300 and $500.  So basically the demand for used, old iPhones is robust in parts of the world where the phones are harder to get or more expensive due to issues with lack of carrier subsidies.   There is a tremendously active secondary market.

Hopefully this won’t be my most profitable trade of the day, but I thought it was an interesting example of supply and demand in a market that is one of the key drivers in the markets that we traffic in every day to make our living.

This post by Dan Nathan (@riskreversal) originally appeared on

Seminal Sentiment Events & Really Cheap Vol

As a sort of rule when it comes to investing in risk assets, you want to have owned stuff whose charts start at the bottom left and end up at the top right.  In the easy money bull market of the last 5 years, there are no shortage of examples that fit this description, and I think it is safe to say the charts of assets that have gone from the top left to the bottom right over the same time period should likely be avoided at all costs at this stage of the game.

One example of an A+ performer would be Disney (DIS).  The shares are up 81% since Jan 1st 2013, nearly doubling the performance S&P 500 (SPX) in that same time period and doing so with very little volatility:

DIS Since Jan 1, 2013 from Bloomberg

DIS Since Jan 1, 2013 from Bloomberg

Since the end of 2012, DIS has grown earnings by about 42% and sales by 15%.  The stock trades at 20x current years earnings, which is around 7 year highs:

DIS 7yr chart of PE from Bloomberg

DIS 7yr chart of PE from Bloomberg

So what about that earnings growth, expected to be  27% in the first three quarters of their fiscal 2014? In the nine months ended on June 28th, the company reportedly bought about $5.1 billion worth of their stock.  Back in Sept 2013, when DIS was in the mid $60s, the company announced an expanded buyback program where they would buy between $6 and $8 billion in 2014. They are getting there quickly and will probably reach the high end target.  Sales growth has been between 3% and 7% for the last 4 years, so managing earnings has been a core strategy to help the stock massively outperform the broad market.

A major byproduct of the Fed’s QE policies of the last 5 years has been to make capital readily available to corporations so that they could put it to work and stimulate the economy. DIS is a great example of a U.S. multinational that has used that capital for financial transactions rather than business investment.  The company sports a paltry 1% dividend yield, has operated well in a difficult environment by using its balance sheet to manage earnings ($155 billion market cap, $4 billion in cash and $16 billion in debt). While the debt to cap ratio is not egregious by any means, the company has been one of the biggest buyers of its shares at all time highs for two years:

DIS chart since 2000 from bloomberg

DIS chart since 2000 from bloomberg

One could have made the same case at any point since the breakout to new all time highs since 2012. But here is the major difference – the U.S. Fed is one month away from ending their policy of QE, which could result in a different rate and risk appetite environment in the coming year.  Another byproduct of QE has been depressed volatility in public markets that, much like low rates, makes buybacks attractive for companies.  As a result implied volatility in many low vol names that have had massive moves could also be very attractive.  Low rates have made buybacks attractive, buybacks have depressed volatility, but all good (think manipulated) things come to an end.

The four year chart below of DIS’s 30 day at the money implied vol (IV) looks much the way you would expect it too, nearing all time lows:

DIS 4yr 30 day at the money IV from Bloomberg

DIS 4yr 30 day at the money IV from Bloomberg

It is my sense that there is a storm brewing here.  Every-time there has been talk of a stock market bubble, the SPX has thumbed its nose at the notion and gone on to make higher highs as equity volatility has grounded down to a halt.  But there have been pockets of equities where the mini bubbles burst and have not been reflated (specifically in tech like 3D, some cloud and internet security and Macau casinos).  The current consolidation in large cap equities at a time where rates seem to be inching up seems like it is setting the stage for the final FU, if you know what I mean.  But let’s see how this market reacts to today’s Alibaba IPO, the largest of its kind, ever, and then Apple’s release of iPhone 6 sales on Monday. Both could be seminal sentiment events for this bull market.

While I have no interest in trying to pick a top, I would say that there seem to be some unique opportunities in the offing as it relates to crowded, overpriced, over stimulated earnings, historically high valuations with record low levels of implied volatility.  Disney just made the list.

Stay tuned, we are considering trades in Disney and a few others that fit the bill.

This post by Dan Nathan (@riskreversal) originally appeared on

Thursday’s Notable Options Activity: Bullish Yahoo Flow Ahead of Alibaba IPO

Calls were much more active than puts among single stocks, led by YHOO ahead of today’s Alibaba IPO.

1.  YHOO – Options traded around 3x the average 1 month volume.  The largest single print was a buyer of 15k x 30k of the Nov 46 / 50 1×2 call spread for a 0.01 credit.  That trade does not lose money unless YHOO is above $54 on Nov expiration.  We’ve seen several 1×2 call spreads in the past few days as options traders take advantage of the inverted upside skew in YHOO, which we discussed in this CotD post from last week.

2.  FXI – Seller of 47,600 of the Dec 42 calls at 0.78 to open.  That’s after someone sold 46k of the Dec 42.5 calls on Wednesday.  FXI made a 3 year high of $42.56 earlier this month, but has sold off back below the $42 resistance level in the past 2 weeks.

3.  SLB – Buyer of 24k of the Feb 115 calls for 2.05 to open.  SLB’s all-time high of $118.76 was set on July 1st.  SLB’s next earnings report is in mid-October, and the stock is still up 16% year-to-date despite the selloff of the past 2 months.

4.  MT – Risk reversal traded, with someone selling around 20k of the Dec 13 puts at 0.13 to buy around 20k of the Dec 16 calls for 0.41, paying 0.28 for the risk reversal.  MT has lagged the other steel stocks in the past month, and has not traded above $16 since mid-May.

5.  BAC –The financials sector hit a new yearly high this week, and BAC touched $17 for the first time since early April.  Calls were active, with nearly 80k of the weekly 17 calls trading at an average price of 0.12, and around 40k of the Oct18th 17 calls trading for an average price of 0.445.

6.  C – Another large cap bank with active options yesterday.  The Oct18th 52.5 call was the most active line, trading over 17k at an average price of 1.60.  C hit its highest level since January, and is 3% away from its 52 week high of $55.28.

This post by Enis Taner (@enistaner) originally appeared on

How To Dismantle Tape Bombs

Over the last few months their have been no shortage of “tape bombs” that could have derailed the equity market rally at all time highs:

-U.S. Q1 GDP down -2.9%
-Commercial Airliner disappearing in thin air (was it terrorism?)
-Overzealous M&A, Facebook buys WhatsApp for $19 billion (with basically no sales)
-Failure of a Portuguese bank reminding us that Euro Debt Crisis may never end
-Mini High Valuation Equity Crash, followed by selective recovery
-High yield selloff in the spring
-War in Ukraine
-Increased tensions between Israel and Palestine
-ISIS Gains in Iraq
-Commercial Airline shot down by Ukraine rebels with Russian missiles
-Scottish independence movement
-IPO calendar heaviest since 2000
-Chinese Growth below prior targets, housing finally showing signs that top was in
-U.S. Fed finally ending QE

After 2013’s 30% gains in the S&P 500 one would think that any one of the headlines above might cause some profit taking. Despite all that, the the SPX’s year-to-date appreciation is still outpacing earnings growth, for the 2nd straight year! So maybe these headlines have simply caused the market to go more sideways than it would have otherwise. (parabolic)

On the bullish side, there are those that would point to a very favorable funding backdrop, whether for debt or equity, corporations deploying cheap cash to buy back their shares, the post-winter economic rebound in the U.S., and most importantly Europe and Japan’s intention to grab the QE baton from the U.S. Fed.

The path of least resistance has been higher as long as the Fed has been buying assets over the last 5 years.  In hindsight it is obvious that little else has mattered.  The SPX has been treated as a “safe haven” asset.

Very soon, investors will need to contemplate what NORMALIZED volatility should look like in risk assets. The most liquid, like the SPX, have obviously benefited from the “Fed Put” as investors have displayed little fear on most tape bombs. You could count on both hands how many days the VIX has been above the long term average of 20 in the last two years.  The chart of the VIX since the heights of the financial crisis highlights one of the main by products of QE, retarding market volatility:

VIX 5yr chart from Bloomberg

VIX 5yr chart from Bloomberg

The decline in volatility, in large part due to the global decline in interest rates, has actually not meant lower overall equity returns, at least in the U.S. equity market.  Stocks have actually performed better in the past 2 years than in the period from Sept 2010 to Sept 2012, despite lower volatility measures throughout.  That’s rare. And while I have no idea when the comfortable, low volatility, one-way market ends, I am fairly certain I know how.  And it ain’t gonna be pretty.

The chart below of the SPX vs the VIX since the start of 2008 will likely be the textbook desired outcome to combat financial crisis rooted in the financial markets for hundreds of years to come:

SPX vs VIX since Jan 2008 from Bloomberg

SPX vs VIX since Jan 2008 from Bloomberg

In the meantime I suspect the “tape bombs” will continue to drop with little fallout.  It will likely take some sort of sentiment shift about risk taking as opposed to something geopolitical to change the mood.  Let’s say we were playing Choose Your Own Adventure and we were to look out one week from now. And the headlines were:

-Alibaba IPO breaks price, causing billions of dollars in instant losses and giving investors an excuse to sell off shares in high valuation sectors not seen since early May

-Apple’s new larger phones fail to cause the “mother of all upgrade cycles” as predicted by experts, with iPhone 6 sales matching those of last year’s 5S/C, stock declines

-Scottish citizens YES vote to succeed from the United Kingdom roils currency markets and European equities see largest weekly decline since 2012

None of these scenarios are a high probability on its own.  In fact, there are dozens of other paths that are possible than the one that we experience day-in-and-day-out.  The issue is not even the underlying risks or the actual events.  It’s that investors have been trained to join the gravy train no matter the path.  When the gravy train finally makes an unexpected turn, that complacency is going to serve many risk-takers a nasty surprise.

This post by Dan Nathan (@riskreversal) originally appeared on

Wednesday’s Notable Options Activity

Wednesday’s volatile session ended near flat, and the CBOE composite put/call ratio ended near even, at 0.95 on the session.  The most active options names were not your usual suspects, and traders mostly focused on upside calls.

1.  KO – The weekly 41.5 calls traded over 25k at an average price of 0.23 on the session, mostly buyer initiated (initial purchase was 13k for 0.19 when KO was trading 41.44).  It’s bizarre to see such a short-dated option trade in a normally quiet stock.  KO has traded between $41 and $42 for much of the past month.  The stock has flirted with its July 1998 all-time high of $44.47 in the past 18 months, but has been rejected each time.

2.  APC – Buyer of 10k x 20k x 10k of the Jan15 120/140/160 call butterfly for $2.30 in the morning.  That trade breaks even at $122.30, which is around 15% higher than the stock’s current level.  The all-time high of $113.51 was set in late August.  The call butterfly buyer chose an optimal midpoint for the fly of $140, which is up more than 30% with only about 4 months to expiration.

3.  FEYE – Buyer of around 10k of the weekly 36 calls for 0.60 in the afternoon.  That line traded over 18k by the close at an average price of 0.72.  No events are scheduled in FEYE over the next 2 days, but the buyer put up around $600,000 in premium for a 2-day option.

4.  CX – Cemex is a Mexican cement company with rarely traded options in the U.S.  Yesterday, there was a buyer of 33,500 of the Jan16 12 / 10 put spread paying 0.45 to open.  CX has not traded below $12 since March, but there is a year and 4 months until Jan16 expiration.

5.  BWP – Trader sold 28k of the Sept 17.5 calls at 1.05 to close, and bought 28k of the Mar 19 calls for 1.75 to open, rolling a long call position out and up.  BWP’s high since its February gap down on its distribution cut is $20.51 from late August.

6.  CNX – Three way bullish structure:  trader sold around 13k of the Jan15 34 puts at 0.66 to buy around 13k of the Jan15 43/47 call spread for 0.63, essentially putting on the trade for even money.  CNX has outperformed the broader coal sector in 2014, and is actually up 2% year-to-date.  The stock’s high of the year is $48.30, while it last traded below $34 in November.

This post by Enis Taner (@enistaner) originally appeared on


YUM Brands has been exhibit A for some of the difficulties of doing business in China.  The company has been hit with one food safety concern after another in the past 2 years, and the stock has stagnated in that period as a result:

GRMN weekly chart, courtesy of Bloomberg

GRMN weekly chart, courtesy of Bloomberg

YUM’s food safety issues in China have morphed from understandable one-offs to a major long-term concern for the restaurant brand, which gets above half of its total revenues from the Chinese market.  The company was first investigated for tainted chicken supplies from late 2012, and then was hit with a decline in demand from a bird flu outbreak in China in the spring of 2013.

The latest revelation occurred in July, when YUM had to suspend a portion of its meat purchases, as reported by the WSJ:

The U.S. owner of a meat supplier in Shanghai apologized and promised a swift response Monday after McDonald’s Corp.  MCD  and Yum Brands Inc. YUM suspended purchases in China in the wake of allegations it sold expired chicken and beef to restaurants.

McDonald’s and Yum, parent of KFC and Pizza Hut, said they halted orders from Shanghai Husi Food Co., owned by OSI Group Inc. of Aurora Ill., after local Chinese media reported that Shanghai Husi was selling meat products beyond their shelf life.

The stock declined 7% on earnings on July 17th from near an all-time on an in-line report, as fast food sales trends were tepid.  However, the continued selling was a result of the meat supply issues reported on July 21st, and the stock has traded below its 200 day moving average ever since:

GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

McDonald’s and YUM have both acknowledged that Q3 sales have been hit in China by the supplier issue.  With that overhang, I’d be surprised if YUM can get above $75 in the near term, even as the valuation continues to look quite cheap (21x P/E for 15% expected earnings growth).  Given all the supply issues, the recent selloff seems to be a sign that investors are not willing to take another chance on the latest YUM Chinese turnaround.

This post by Enis Taner (@enistaner) originally appeared on

Yellen Fire in a Crowded Trade

All eyes are on the FOMC’s policy statement due out this afternoon and if you were to read the financial press over the last few days you would think that the fate of the entire bull market hinges on whether two words are lifted from the policy statement.  These statements from John Hilsenrath of the WSJ yesterday lit a fire under the market’s ass:

In a webcast Tuesday, I explained why I thought the Federal Reserve would stick with, but qualify, an important phrase in its policy statement Wednesday which assures near-zero interest rates for a “considerable time.” This was simply my best analysis of where I think the Fed is going based on what we have been reporting and what officials have said in the past.

Last night on CNBC’s Fast Money program, we had Nomura’s Jens Nordvig, top ranked FX strategist at Nomura Securities, who took the opposite stance.  He suggested that the Fed would surprise complacent investors who think that the probability of rate hikes as soon as March 2015 are too low.  Watch here:

I guess that’s what makes a market. For those looking to place a wager on who is probably right, at least on the language part (not the market reaction), my esteemed Fast Money colleague Brian Kelly made the point that Hilsenrath, who was long thought to be Bernanke’s go to “Trial Balloon Floater” in the media, likely got the news straight from the horse’s mouth.

It didn’t surprise me that equities rallied on the thought that the Fed, despite nearing the end of QE, would continue to jawbone rates lower for “considerable time.”  What did surprise me is that bonds (measured by the TLT) closed on the lows of the day, down 40 bps.  As I write, the TLT is up about 50 bps, so maybe yesterday’s price action was just a short lived dislocation, but I would guess that the bond market’s reaction today will be the one to watch for broader market implications.

We have made this point on more than one occasion in the last couple months - the S&P 500 appears to be one of the few risk assets lacking movement over this time period.  We have seen fairly dramatic (at least on a relative basis to U.S. equities) volatility in currencies, commodities, bonds, and even European equities, but the SPX remains the stalwart.

I would add one more point heading into the Fed’s statement.  While no mention of stretched valuations is likely in the statement, investors should listen keenly during the 2:30pm press conference for some hints.  Will Chair Yellen be asked her opinion on current equity market valuations?  Will she update her views on biotech and social media?  Those are the two sectors Chair Yellen singled out in her July testimony to Congress and caused a short term panic.

In that sense, the press conference is probably more important than the statement itself, whether “considerable time” is in there or not.  The press conference will be the platform for Chair Yellen to guide the market towards the Fed’s expected action path, while allowing for some wiggle room if the circumstances change in the interim.  While there will be plenty of trigger happy traders who are quick to react to the 2:00 pm EDT statement, we’d rather wait until the tone and language of the press conference to get a better sense for any changes in the macro landscape.

This post by Dan Nathan (@riskreversal) originally appeared on

Tuesday’s Notable Options Activity

Options on macro ETFs were more active than single stock options as traders positioned ahead of today’s FOMC announcement.  However, YHOO continues to be a very active name for options traders given Alibaba’s IPO on Thursday.

1.  YHOO – Weekly options dominated volumes.  Largest trade was a buyer of 30,000 of the Sept20th 39 puts for 0.36 to open paired with a purchase of 600,000 shares of YHOO for 41.90.  A separate print was a buyer of 2500 x 5000 of the Sept20th 43 / 45 1×2 call spread for even money, a nice risk/reward trade if you view the odds of a move above 47 as quite low by Friday.  Outside of the weeklies, the Oct 50 call was the most active line, trading over 14k at an average price of 0.74.

2.  QEP – Big 3 way trade:  trader sold 30k of the Sept 31 calls at 1.45 to close, to buy 30k of the Dec 32 calls for 1.84 to open, and to sell 23k of the Dec 29 puts at 0.60 to open.  In effect, the trader rolled the long Sept 31 call position into a Dec 29/32 risk reversal, and collected 0.21 in the process.  QEP has traded between $25 and $35 for much of the past 3 years.

3.  MON –Seller of 21,650 of the Apr 115 calls at 5.15 to open.  MON has sold off more than 10% since its late June high as grains prices have lagged.  The call seller could be an overwrite against a long stock position, anticipating little upside in MON over the next 6 months.  MON’s next earnings report is in early October.

4.  SUNE – Buyer of 13k of the Jan15 21 calls for 2.23 to open.  SUNE has been rangebound since March, between $16 and $24, and 30 day implied volatility recently hit a 2 year low as the stock has stagnated.

5.  FCX – Calls were very active, as calls traded over 4x the 1 month average, largely after the Chinese bank injection headlines hit the tape.  FCX and copper prices both reversed from near 3 month lows.  The weekly 35 calls traded over 20k on the session.

6.  GTAT – Another put roll in GTAT, similar to Monday, as the trader sold 7,000 of the Oct 18 puts at 5.30 and 3,000 at 5.40 to close and bought 17,000 of the Oct 12 puts for 1.30 to open, likely protection.

Whale Hunting in Herbalife…Call Me Ishmael

Ackman, Icahn… Icahn, Ackman.  After the past few years it seems like these two hedge fund titans go together like peanut butter and jelly.  Both have been extremely vocal advocates for shareholders of publicly traded companies, most notably themselves.  Both have had some very high profile successes – Ackman (Allergen) and Icahn (Netflix, Family Dollar, Apple and Chesapeake).  However, like other investors, both have also had their share of disappointments – Ackman (TGT & JCP) and Icahn (well, there aren’t many, but currently targets EBAY & RIG are underwater).

What connects the two billionaires more than anything though, is their battle over Herbalife (HLF).  Ackman is short a good chunk of the 42% short interest of the $4.1 billion market cap company and Icahn, who became the largest shareholder in late 2012, owns 18% of the shares and holds 3 board seats.  Ackman thinks the company operates a pyramid scheme and will be shut down by regulators, while Icahn, aside from wanting to inflict pain on Ackman, thinks the company is cheap and under-levered.

Regular readers of the site know that we are not fans of HLF (read here and here).  Specifically after reading and viewing Ackman’s presentations, we agree that there is something fishy, but we have not done any real independent work and feel that this is a bit of an adult swim situation (billionaires only).  This past spring I did get a little fired up as a HLF bear when it appeared the company was pulling out all of the stops to squeeze Ackman on the short side and put on a bearish trade with defined risk, here. Herbalife issued a $1.15 billion convert and used the proceeds to aggressively buy back shares at what are now much higher prices.  In April, management suspended the dividend to use the proceeds to buyback shares.  Sounds like the moves of a desperate company in my opinion.

Despite all of this corporate action in 2014, HLF shares are down 43% on the year, today trading at new 52 week lows. In periods past, opportunistic longs have taken advantage of the potential for short squeezes given the high concentrated short interest (Dan Loeb of ThirdPoint was one), but currently it doesn’t appear there are any incremental buyers.  Taking a look at the top 10 holders in the latest 13f filing of large holders as of June 30th, it appears that there have been more sellers than buyers (far right colum below).  That has likely continued to be the case over the course of the summer and will be revealed in October when Q3 filings are released:

HLF top 10 holders as of June 30th, 2014 from Bloomberg

HLF top 10 holders as of June 30th, 2014 from Bloomberg

So I ask you this… If you had Carl Icahn’s Midas touch, would you want to have any of your record tarnished by an investment that, for all intents and purposes, started out of spite?  It doesn’t take a genius to see that no matter whether a pyramid scheme or not, there is something fishy going on at HLF.

Now Icahn, as the largest shareholder and controller of three board seats, can’t just sell in the open market   I suspect that if Icahn wants out while he still has a profit, or before he is willing to try to take the company private, he is actually going to have to take a page from Bill Ackman’s playbook. That being Ackman’s failed JCP investment from 2010 to 2013.

To refresh, Ackman took a stake in August 2010, got board representation in Jan 2011, resigned from the board on Aug 13th 2013, and then sold his entire stake on Aug 26 2013:

JCP 5 YR Chart from Bloomberg

JCP 5 YR Chart from Bloomberg

Reports suggest that Ackman lost close to $500 million on this investment.  However, his sale was still above the stock’s current price, so his exit looks like a good decision, especially considering his strong performance in 2014.

In January 2013, Icahn and Ackman famously battled on the air of CNBC’s Halftime Report, officiated by Scott Wapner (if you haven’t seen it’s a must watch here).  But just this past summer, Wapner got the two back together, face to face, at CNBC’s Delivering Alpha conference so they could hug it out.  Activist Bros.

The reunion was awkward of course (watch here) but you got to give both credit for attempting to bury the hatchet. While HLF did not get a lot of attention, but one of the last topic’s covered, Ackman was quoted as saying per

“It’s not about winning,” Ackman said on Herbalife. “I would love to find a way to get Carl out of this stock.”

If I were Ackman, I would propose a transaction to Icahn.

Buy all 17,000,000 million shares that Icahn owns, at a big discount to current levels, but above his average price, effectively covering a portion of his short and get Icahn’s representatives off of the board.  But prior to this proposal I would lever up on over the counter puts, put spreads, short calls in listed market, whatever I could get my hands on that reflects my bearish view. Once Icahn is out, this thing is TOAST!!

This sort of proposal creates an incremental buyer, something Icahn would sorely need of if he is to ever exit his position. A buyer which, at the moment, does not appear to exist.  That would be a nice little commission for the broker that could get these two hedge fund whales together and put this little HLF disagreement to bed.

This post by Dan Nathan (@riskreversal) originally appeared on

Positioning Your Yahoo Long Post Alibaba IPO

Last night on CNBC’s Fast Money program we had a short discussion on the Alibaba (BABA) proxy trades leading up to this Friday’s IPO.   You’d have to live under a rock to not know that YHOO has an almost 25% stake in Alibaba, and that being long of YHOO has been the most favored method by U.S. investors to ride the BABA wave pre-ipo. Most of the BABA value was expressed in YHOO shares in 2013, as the stock rose more than 100% from the Jan lows to the Dec highs.  Until very recently, the stock had been an under-performer and down on the year for most of 2014:

YHOO since Jan 2013 from Bloomberg

YHOO since Jan 2013 from Bloomberg

In the low $30s back in mid July, YHOO was clearly reflecting investor discontent with their core business and management’s lack of vision of how to deploy their impending cash hoard.  I am in the camp that the high tick for YHOO is likely to come sometime in and around the BABA IPO. I obviously have no clue on that price, but when you think hard about the set up, the quick sentiment shift, and the lack of real action for YHOO’s core post ipo, I suspect fast money comes out of the shares fairly quickly.

My view last night on the show was that if you are long, and would likely sell in the high $40s in the near term, it makes sense to set a limit order by overwriting your stock, by selling an out of the money call.  The example I used last night with YHOO at $42.50 was to sell the Nov 50 call at 1.30.  If the stock is below $50 on November expiration you collect $1.30 or about 3% of the underlying stock price.  If the stock is above $50 your stock is called away at $50 but you have effectively sold your stock at $51.30, up almost 21%, not a bad call-away level.

One reason this sort of “limit-order” makes sense is that implied volatility (IV), the price of options in YHOO, has shot up to levels not seen since 2011 which was a bleak time for the company with the secular trends in internet use towards mobile and social leaving them behind:

YHOO 4yr chart of 30 day at the money IV from Bloomberg

YHOO 4yr chart of 30 day at the money IV from Bloomberg

From where I sit, it is hard to contemplate any options trade in the very near term that does not look to take advantage of the relatively high implied volatility.  Here is another trade overlay for longs who do not plan on selling to consider: a collar, selling an upside call against long stock, allowing for further participation to the upside, and using the proceeds of the call premium to buy a put or a put spread offering some downside protection.

For instance with the stock at $42.50, sell the Nov 48 call at 1.75 and buy the Nov 40/35 put spread for 1.65. This overlay would result in a .10 credit.  Between 42.50 and 48, you have the gains of the stock of up to 5.50, or about 13%, but the stock is called away at $48.  Losses of the stock are between 42.50 and 40, but protection between 40 and 35 on Nov expiration, but none below $35, or down about 18%.

Both the call sale and the put spread collar take advantage of the high implied volatility levels in YHOO to structure a good risk/reward options trade.  These situations have been few and far between over the past 2 years given the low level of volatility throughout the U.S. stock market.  In the case of YHOO, volatility is likely to decline dramatically once the Alibaba excitement is out of the way.  As a result, it’s an environment where options buyers in the 1-3 month maturities should beware of a potentially severe vol crush.

This post by Dan Nathan (@riskreversal) originally appeared on