Market Update - Still Duking it Out With AZO

An update on the status of my short with AZO:

My prior trading update noted I had sold some Bear call spreads which is basically option talk for selling options at one strike and buying options at a higher strike price. I used March options to take advantage of the time decay effect which reduces the value of out of the money options.

As AZO continued to climb, I also sold a few naked calls as well. This selling a call without owning the stock or buying a higher priced call for protection, and is therefore more exposed to risk. I sold some 165 and 160 calls as AZO was in the low 160's.

Options expire on the 3rd week of the month which was March 20, so I was at my station to make any adjustments to my trading positions, such as buying back any of the calls that were in the money- otherwise the option will be exercised meaning I'd have to sell stock I don't have.

So that Friday,. AZO starts moving up then begins to track down past 160 to the mid 150's. That means my 165 calls and 160 calls I sold will expire worthless and I get to keep the money I sold them for - sweet!

Then AZO starts moving back up....past 157...158...159....and over 160 again...doh! Now my 160 calls are back in the money so I'll have to buy them back if the stock stays there.

Then all AZO does from that point on is hover near 160...sometimes a little above...then slightly below. There's only 1/2 hour left until the markets close and the stock is still hovering to a little above 160 to a little below. The option is priced at $20 which I think is ridculous for an option with less than a 1/2 hour before expiration that's fluctuating around zero gains. I decide to keep waiting to see if the price get lower. With 10 minutes remaining, the price drops to $15/option, which I still think is too pricey and AZO is moving from 159.90 to 160.07.

Five minutes left and the price is still holding at $15 and AZO is still hugging the 160 line moving the option slightly out of the money to slightly in the money. I don't want to buy back the options if I don't have to so I keep an eye on the stock to see if it will stay under 160.

With two minutes left I have to make a decision soon. The $160 options are still priced at $15 and AZO is at 159.50...159.8... 159.9, 159.8......159.7....

One minute left and I feel like I'm in Vegas...will AZO close under 160? The stock is fluctuating in 159.7 range and higher but it looks like it will close below so I decide to not close my $160 calls and go for it!

20 seconds left: 159.8,...159.9,.....159.8,...159.7.......159.8

As the closing bell sounds....the final price is......

$159.50

Yes! The $160 options have expired out of the money and I didn't have to spend any cash buying the options back.

However,

Twenty seconds later a late trade confirmation comes in and the closing price is upated to $160.03...doh! In the money by 3 measly cents!

Did the options get exercised for 3 measly cents? Yes they did. For each 160 call I sold my account was shorted another 100 shares of AZO at $160. So now I had a much bigger short position than I wanted so I was a little nervous thinking I could get stung if AZO started moving up on Monday. I was ready to buy some calls or close up the extra shares quickly in that situation.

When the morning bell rang on the following Monday, AZO pulled back below 160 to the mid 150's again so I was able close my additional short position for extra profit...whew!

This month I've got both bases covered with with long calls and puts so my position will make profit as long as AZO moves alot in either direction, although my current bias is still more bearish than bullish- meaning my profit will be greater if AZO falls instead of climbs.

Trading Update: Engaged in Battle with AZO

My lone short term position is currently in AZO, which I am determined to convert into a profit despite its current strength.

My analysis tells me it's way overbought and options open interest point to a lower close next wekk unless the market makes feel like being generous and letting a boatload of calls remain in-the-money.

AZO surged over 7 points today- a painful move for any Bear with short positions and I'm sure many were chased out and had to close their positions, which probably helped with driving up the price.

To defend my short position, I had sold some puts last week and created some bear call spreads, where you sell a call and buy a call at a higher strike price. With today's surge up, I closed the puts I sold for a profit, sold a few March calls, and bought a few April puts. If AZO does reverse and head south I will profit off the calls I sold as well as from the puts I brought. If AZO continues to move up, I can create a short term bullish call spread as a hedge.

I have absolutely no doubt that AZO is too rich in value compared to its earnings for this economy and will give back much of these gains. They do have a good business for this type of economic climate but certainly not enough to be making all time highs. So the question is when will the music stop and AZO fall back to more realistic levels? It's only a matter of time.

My thoughts are AZO should settle somewhere between 140 and 150 for options expiration next week.....we shall see.

The Scourge of Traders Using Limit Orders - The Dreaded Whipsaw

My "automated" trade in DV ended last week for a net loss...about $1000. This thing is, it didn't have to be that way.....

1st Mistake - too early to jump in the trade. A couple of months ago, I began the short and got too enthusiastic in shorting more as it continued to climb rather than wait for the price to start dropping.

The result of that is DV kept rising due to my current "King Midas" power of picking stocks that seem impervious to the bad economy, which force to to actually buy back a hundred shares as it kept climbing to keep my accounts margin equity at the proper levels. I didn't panic and close my position as I still had a big position and knew the stock would eventually fall...

Which it finally did last week. Now it was time to get paid....

But.....

Crafty stock DV falls enough to activate my stop limit order then reverses and heads back up to trigger it's execution for minimal profit. Then shortly afterwards, the stock drops again and stays down.

The end result is being "whipsawed" out of my trade. What could have been an easy $3000 profit would up being about a $1000 loss....

I can only hope that that will teach me to get better at setting up my stop limit orders, as well as have my patience in waiting for a better trade entry.

The silver lining is my analysis was correct and DV did fall as planned, and the loss could have been huge if I covered my whole position when it was in its run up mode.

That leaves me with just one current position, AZO- and this is another "golden stock" defying gravity. This is going to be another tricky trade since it's taking its sweet time to start dropping, but my goal is to make this ultimately successful using options and taking advantage of the stock's volatility.

The Good, The Bad, and The Ugly

Time for some trading updates.....

My trade in NUE has finally completed after a prolonged wait of about an extra 2 months....

The Good:

I made about $617 profit on my 300 share trade. That's not much profit, but I'll gladly take it over a loss, which is what I had for several weeks while I was waiting it out.

The Bad:

If my timing was better, my profit "should" have been in the $4K - $5K range. I jumped the gun on this one, and it cost me.

The Ugly:

Another short of mine, Autozone (AZO), reported better than expected earnings today, and the stock jumped up over 11 points....ouch!

Luckily, I don't have a large amount of shares so the current loss isn't as bad as it could have been...but it is a good amount. What am I, King Midas...choosing stocks that like defy gravity even though the overall market is tanking?



Even worse is I KNEW the stock could move big either way and yet I didn't hedge my upside risk by buying some calls- I know better than that.

It certainly was a expensivegood wake up call to be more alert to the tools at my disposal.

Now my challenge will be to work this trade back into a profit or at the least minimize losses. It's going to be a good real-world exercise....


I know that if I get my timing and patience under control, there are enormous profits to make in this market even in this economy.