Weekly Update (7/31/2017)


Short Term

If you're beginning to get frustrated by the back and forth nature of the market this summer, you're not alone. Many of our members are expressing feelings of being fed up with this movement the past couple months. Options accounts are going from lows to highs back to lows, and it feels like volatility is the highest it's been during any summer in recent memory. This is also happening at the same time that the VIX (Volatility Index) is hitting all time lows. The reason for this is due to the decreased correlation between the major indices and individual stocks. There are huge moves being made in certain tickers, while the indices experience relatively little movement.

We saw the steel companies we've been touting (X, AKS, and CLF) report stellar numbers, and each stock we had recommended rose over 10% on the day they reported. Shortly after, AKS caught a downgrade, and every steel name, aside from X, plunged past their weekly low, giving up the entire gain and then some. With AKS and CLF sitting close to support, we expect a bounce in the near term.

We saw biotech rise quickly at the start of the week, and then take a sharp turn south. GBT is retesting the low end of its range for what feels like the tenth time, so we added a little more and expect this one to go soon.  

We continue to like China, which seems resilient to the volatility plaguing the market right now. With a bigger pullback, we like JD, BIDU, and SINA to continue to run higher. A little while back, we charted out a multi-year breakout for BIDU, which seemed to have happened this week after a stellar earnings report. We hope you're in it, though there might be one last retest from these levels.


Dealing with Volatility

For options traders, volatility can either be massively rewarding or devastating on an account. Your portfolio could be up 10% on one day, and down 10% the next.  Weeks worth of gains can be erased in a few sell-offs -- the famous phrase is "stocks take the stairs up, and the elevator down."  You need to be prepared for this kind of market action, because if you are not careful with your positions, you could suffer a lot of pain.

The entire trick with option trading is predicting where a stock price is going to be after a certain period of time. If you choose too short of a time period for your option, the stock move might not happen in time and you end up losing money. If you buy too much time on your option, you could be spending money that you don't need to be spending. In markets that have the type of swings that we are seeing, it's much better to buy longer-dated options to ensure that, even if the stock gets beat down, it will have time to rally back to your predicted price. This seems obvious, but it turns out that buying more time can just increase your losses if the stock never makes a move. 

Premium burn (also known as time decay or theta decay) happens when you expect a stock to move a certain amount in a given period of time, but it ends up moving too slowly or not at all. You can be right about the direction of the price movement, but wrong about the speed (volatility) of the move and still end up losing money from theta decay. We will talk about some ways to manage this volatility below. 


The Trade:

Picking your entry is more important during a volatile market than any other time. Stalk the entry you want, be patient, and execute your strategy with discipline. Knowing the range a stock is trading in is important, and chasing up a volatile stock can be dangerous when it plunges after a big gain.  

Because of this, we also stress going more conservative during these times, and focusing more on common stock positions and longer-dated options. Short-dated options can get crushed if you time your entry poorly, and unless you are dead-right on a position, it's easy to lose money trading this way. In markets like these, the risk of time decay is worth the protection that you have against volatile movements.


Long Term: FND

Floor and Decor is a specialty retailer for hard surface floors that has enormous potential for growth and is an industry that has little exposure to the retail beast that is Amazon. Last week, they reported record revenues and increased guidance for future earnings reports. The market responded with a selloff that provides a unique entry point for those interested in the stock.

FND has three major things going for it:

  • Fully verticalized supply chain for brand products
    • FND controls the entire manufacturing, sales, and installation process for their own products, which gives them much wider margins and greater earnings potential than competitors like Home Depot.
  • Growth potential 
    • FND has only 72 stores operating in 17 states currently, with plans to expand across the US. For reference, Home Depot has around 2,200 stores in North America
  • No (current) competition with Amazon
    • FND’s main customers are contractors and renovators; people who need to evaluate their materials in person before making a purchase. For more novice customers, FND provides the in-store expertise and in-home installation that Amazon won’t be able to match for years to come.


The trade:

Buy and hold this one for 5+ years, pretty simple.

Side Note: This ticker is actually a fantastic play for a pairs trade like the one we mentioned last week. If you want to hold short positions against underperforming retailers, FND would be a great long-term pick to even out that trade. 


Happy Trading

- The Minotaur Team