Closing the door on Valeant…for now

At this point the it seems like the catalyst I was looking was a non-event. Today, Valeant issued it’s delayed 10K. The news from CNBC stated that…

“the restatement reduced previously reported fiscal 2014 revenue by about $58 million, net income attributable to its shareholders by about $33 million, and earnings per share by 9 cents.The restatement for the first quarter of 2015 lowered revenue by about $21 million, but increased net income attributable to Valeant by about $24 million and earnings per share by 7 cents.”

Trading was hauled this morning for the first few minutes of trading. Once it resumed the lackluster price action was a clue that the information had already been baked into this stock. With this catalyst off the table my upside was taken away and the trade became more risky. I took my final position off the table. I am completely out of the trade. In summary, I had 11 different trades for a total $3371 and %134 percent gain.

VRX4.29

For previous recap see my earlier blogs here and here

Trade Summary

Trade 14: Combination of stock and options on VRX. Valeant Pharmaceutical. 

14 (a)

  • VRX stock
  • Date: April 5-April 19
  • Gain: $1267
  • Avg. purchase price: $30.54
  • Avg. sale price: $33.42
  • Percent Gain: 10%

14 (b)

  • Sold to open VRX April 15 $32 put
  • Date: April 14
  • Gain: $109
  • Avg sell price: $0.77
  • Avg buy price: $0.61
  • Percent gain: 20%

14 (c)

  • Sold to open VRX April 15 $32.50 put
  • Date: April 15
  • Gain: $100
  • Avg sell price: $0.54
  • Assigned stock
  • Percent gain: 100%

14 (d)

  • Sold to open VRX April 22 $31 put
  • Date: April 18
  • Gain: $78
  • Avg sell price: $1.19
  • Avg buy price: $0.72
  • Percent gain: 40%

14 (e)

  • Sold to open VRX April 22 $32.5 call
  • Date: April 15-19
  • Loss: $183
  • Avg sell price: $1.45
  • Avg buy price: $1.84
  • Percent Loss: -26%

14 (f)

  • Sold to open VRX April 22 $33 call
  • Date: April 18-19
  • Loss: $40
  • Avg buy price: $1.69
  • Avg sell price: $1.44
  • Percent Loss: -17%

14 (g)

  • Bought to open VRX May 20 $30 call
  • Date: April 5-April 7
  • Gain: $1126
  • Avg buy price: $4.6
  • Avg Sell price: $5.96
  • Percent Gain: 30%

14 (h)

  • Sold to open VRX May 20 $35 call
  • Date: April 6-19
  • Gain: $20
  • Avg buy price: $4.94
  • Avg sell price: $5.22
  • Percent Gain: 5%

14 (i)

  • Sold to open VRX May 20 $35 put
  • Date: April 6-19
  • Loss: $115
  • Avg buy price: $5.93
  • Avg sell price: $6.94
  • Percent Loss: -17%

14 (j)

  • Bought to open VRX May 20 $40 call
  • Date: April 11-29
  • Loss: $100
  • Avg buy price: $2.11
  • Avg sell price: $1.24
  • Percent Loss: -41%

14 (k)

  • Sold to open VRX May 20 $30 put
  • Date: April 11-29
  • Gain: $233
  • Avg buy price: $5.45
  • Avg sell price: $7.84
  • Percent Gain: 30%

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Valeant longs looking forward to less worse news this week!

In this blog I will discuss:

  • Why this is an important week for Valeant Pharmaceuticals shareholders
  • Positive and negative viewpoints
  • Weekly chart
  • Possible entry locations
  • Past and present trades

Supposedly, this is the week Valeant Pharmaceuticals will deliver on their promise to file the company’s 10K. A simple good faith filing without newly discovered and devastating financial results could send shares soaring. Most analysts know the company’s debt troubles and therefore have already priced the stock accordingly. There are fears that could support the bearish case if Valeant misses their June 11th time frame to file, or can’t follow through with filing this week.

Other fears that might drive Valeant stock down include the possibility that government will put a price cap on drug pricing. This would surely hurt profit margins but drug price caps haven’t happened yet therefore any short-side trade based on that assumption is simply an unfounded speculation. I do think price caps could be a problem but Valeant’s main opposition is Hilary Clinton who might not win the candidacy.

Some real concerns remain over Valeant bondholders restructuring the debt. Will they file bankruptcy? Right now I don’t see the bankrupt scenario playing out since bondholders would suffer losses. Small scale changes in debt repayment could be a positive catalyst for the stock if it helps the company build cash and sell assets.

Honestly we don’t know what will happen, but I think it’s unlikely they restructure in a way that would cause losses for stock and bondholders beyond losses long term investors may currently be sitting on. I also think government would love to get their grubby mitts on pharmaceutical profits and won’t jeopardize this by requiring devastating price caps that would cut potential profit on higher tax rates to pharmaceutical companies. This was recently proposed by Motley Fool as a reason why not to own Valeant, see article.

Moreover, I think future price action should prove or disprove these arguments as insider’s will load up or sell out before any big news hits the wires. Right now, it’s a little early for folks to be making extreme claims that support their bias view, which is not my intention, however I would be remiss to not share with you that I am leaning bullish on Valeant simply because the news has gotten less worse.

I’ve written before, the news going from horrible to less worse is a positive sign for the company, see article. Going from horrible to less worse might be a funny way to put it, but however you put it, it doesn’t change the fact that short-side traders got squeezed when this shift in news sentiment occurred on April 5, 2016. Just like then, they could get squeezed hard this week if Valeant’s 10K filing is well received.

Skeptics have gone as far as saying the recent shift from horrible to less worse news is a smoke screen, and the rug will be pulled out from under the stock once they file their 10K, or don’t! Despite much bad news this past year I’m taking a contrarian view and I don’t believe that Valeant is going to make new lows unless news gets worse.  For me, a break of the $30 and then $25 support zones would be ugly.  Unless something is truly wrong under the hood, the stock should bounce right off of those levels if tested. Given the inherent risk in this trade I only have on a small position and won’t add any new exposure until more news is out or price action confirms direction.

Interesting points of reference for traders this week might be the first touch of $VRX at or below $35. This would be a good spot to go long on a re-test from the gap support which held last Friday. If $VRX can’t stay above $34.90 and your scalping, remember not to let your losses add up or to scale into the trade small. Next interesting buy on dip levels are $33.40, $33 and $32.80. Anything below $30 is suspect, above $37 possibly bullish. Trading $VRX to me requires letting the price direction confirm your belief. Given the volatile nature of of this trade this can be even more difficult to do so tread lightly with your entries. Caution is advised, and swinging for the fences probably isn’t a good idea. If you are trading on margin you should know that $VRX has a higher margin requirement than most other stocks.

The weekly chart is showing a rising channel. I expect this channel to be broken to the upside once the 10K is filed but will be out of my trade if bad news sends the stock plunging I will be out!

Capturevrx

 

Open trades

VRXopen

Closed Trade

Capturevrxclosed.PNG

vrxclosed2

VRXclosed3

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Home Run trade on Home Depot

In this blog I will explain my thought process and reasoning why today I scalped Home Depot for a home run.

New All Time Highs

Home Depot ($HD) recently made a new all time new high this week, Monday, March 4 at $136.23. You may know a similar saying, “new highs are likely proceeded by new all time highs”. That’s more of a side-note than the basis for my trade.  What was compelling was that it pulled back over the last couple days with the market. The current profile showed more bullish strength and it was a good opportunity to get in on the action!

HD_Daily

Stock Market Bounce

The market recently pulled back two days in a row. I was looking to see if the $SPY $204 level would hold. Given my skeptical view on this rally, and as depressingly resilient this market has been for bearish trades, there is a lot of volume distribution at $204. A solid break below $204 would signal a liquidation break and a more bearish stance however the pivot point held at $204. At a pivot point you see that the greatest amount of trades happened in this range. I use the Volume by Price indicator to show me where this range is. The key importance here is that these places in the market profile are where traders have to make decisions whether to sell or to buy. These ranges in the market profile are back-stories for us to see on the chart and show multiple dimensions; time, volume and price.  When these three things line up in the market profile it can be a good place to enter a short-term trade. Volume and price showed recent accumulation around $204 (For Home Depot there was good accumulation between $133-$134). When the price didn’t break below these levels in the first 5 minutes of the day traders quickly had to decide to buy or sell.  It was game on for the traders and the long side scalp paid off.

SPY Chart Below:

SPY4.6

Another intermediate indicator I used was the 15 minute 100 exponential moving average. This is the green line on chart below and shows that every dip below has been bought up.

HD_15min

The scalp this morning turned into a pretty decent gain as momentum was strong and the market rallied.

Full results below:

HD

 

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When horrible news gets less worse. Playing the Valeant bounce

In spite terrible news over the past year the news has gone from horrible to less worse and there is a glimmer of hope for this beat down drug company.

On Tuesday April 5th, Valeant Pharmaceuticals announced that a special board committee had completed an internal investigation without discovering additional financial fallout from the firms previous ties to a controversial pharmacy company (Philidor). Furthermore the company has set plans to meet a key April 29th filing deadline required to avoid potential default on debt obligations. (Since writing this, “less worse” news has revealed information that Perrigo’s Joseph Papa is finalizing deals to take over as CEO).

The trade idea came about on Thursday April 7, when Valeant won support to waive a default on their loan, as well as other eased restrictions. New update on position here.

At times, I lean more contrarian in my trading approach which is why this recent spurt of good news led me to initiate a trade in Valeant using options contracts and stock, symbol $VRX. In this blog I will outline my open and closed trades and how I have so far successfully played this potential reversal in the trend.

You probably know the famous Rothschild quote, “the time to buy is when there’s blood in the streets“. Looking at the 12 month chart of Valeant one can see that the blood has flooded the streets for this stock.

The blood starting spilling late in 2015 when industry experts started arguing whether or not Valeant is the next Enron and might go bankrupt and politicians, like Hillary Clinton created a flash crash in Valeant’s stock with promises to “go after” drug companies with high prices.

clintontweet

Shares of Valeant have dropped 744% since this Tweet was posted on Sep 21, 2015.

chartclintontweet

I really hate that companies like Valeant can price gouge drugs. It makes me sick to see patients selling their homes and taking on more debt to buy a medicine that should be more easily available to the average person. But just because I feel this way (just like many feel this way) does not mean Valeant is going bankrupt!  One thing I’ve learned is that the market does not have a moral compass. If it did, the market wouldn’t have rallied after the March 22 terrorist attack in Brussels (see chart below).

spy3.22a

I’m almost to my trades but wanted to share this last chart of $VRX dating back to year 2000. Notice the huge volume this year. Keep in mind, for every seller there is a buyer. I’m suspicious that large institutional buyers are gobbling up shares of Valeant at discount prices, just like Rothschild would have done in the 18th century. This is the contrarian in me. It’s also very hard to say for certain who is on the other end of this trade but I am taking a very small bet that the smart money is getting ready for a reversal in trend.

VRXweekly2000

Here are the trades. 

Trade 14(a): 4/5/16 -4/7/16 (closed)

  • Lightly bought to open the $VRX May 20th $30
  • Price Paid: $4.14
  • Avg Price Sold: $5.96
  • Avg. Percent Gain per contract: 30%
  • Highest Percent Gain: 88%

VRX

Trade 14(b): 4/5/16 -4/6/16 (closed)

  • Lightly bought shares of $VRX at $28.27
  • Sold half at $30.20
  • Percent gain: 7%

Trade 14(C) 4/6/2016: VRX (straddle)

  • Straddled remaining shares with May 20, 2016 35 put/call for $11.20
  • Sold to open May 20, 2016 $35 put
  • Put premium collected: $5.81
  • Sold to open May 20, 2016 $35 call.
  • Call premium collected: $5.31
  • Total premium collected: $11.12

If you’re new to options trading the trade is a little more complex.  I’ll try to break it down:

The put side of the trade:

They way this trade works on the put side is that I promise to buy 100 shares at $35 IF the stock is below $35 come May 20th expiration. Because I made the promise by selling the options I collected $5.81 per contract ($581 total). My cost basis on this promise is $35 minus the $5.81 premium I collected so my break-even is really $29.19. That is a 17% decline from today’s close!

The call side of the trade: 

The way this trade works on the call side is that I promise to sell 100 shares at $35 IF this stock is above $35 come May 20th expiration. Because I kept 100 shares which were bought at $28.27 I am promising to sell the stock at $6.73 profit per share. But because I also collected a premium of $5.31 for selling this contract my real profit per shares would be $12.04. That’s a 52% gain.

My break even:

If the stock is below $35 on May 20th and I keep the put that I sold I will have to buy the stock at $35 per share. With 200 shares my cost basis per share will be $31.63. That doesn’t include the total options premium I collected for selling my strangle. Including the total premium would drop my cost basis down to $20.5 (31.62-$11.12).

The question to seriously consider is if this stock could drop 41% from today’s close. This would mean the shares are at my break-even of $20.5 and I would seriously need to consider whether or not this is another good buying opportunity. It may or may not be, but one thing I know that will help me determine this is if the bad news has gotten worse!

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Sell the TSLA news?

Tonight is the big event for Elon Musk and Tesla as they reveal the new Model 3 electric car. I must say, the hype around this day has been quite exuberant and very noisy. Don’t get me wrong. I am happy we’re finally realizing the need for efficient vehicles. I’d also like to think that I’m an environmentally conscientious person. I live in Washington State, one of the most beautiful places on earth surrounded by mountains, rain forests, lakes and rivers. I love where I live partly because of the beauty here and I greatly appreciate the need for us to shepherd our planet and keep it clean for our children’s children’s children…However, that has nothing to do with why I buy and sell stocks.

Watching TSLA’s parabolic climb, 70% off the Feb low, has been like watching a firework shoot up into the night sky on the fourth of July. Some of you may remember my blog on Feb 23rd and why I thought a short trade setup was occurring around the $180 price target, see here. Although I did well on the day-trade, my thesis that $180-$190 would provide some short-term resistance was dead wrong as the stock has since climbed up to a high of $240.

TSLA3

The TSLA cult has pumped this stock well above the level I had imagined for the short-term. I’m not saying that TSLA can’t go higher. My point is that it has gone too high too fast and parabolic moves like this really don’t last long or end well. So, here I am once more beating the drum to short TSLA, however this time it’s for a different reason.  Many investors know it’s smart to buy the rumor sell the news.  Although, and in hind-sight, it would have been stellar to buy the rumor and participate in the TSLA stock rally, I think we are at a point where selling the news might be the right trade.

That is why I entered a very small yet speculative short position on TSLA. I bought the April 8, $240 put today when the stock was trading around $236 (Today’s high was 237.42 and low was $225). I only purchased one contract. I know, that doesn’t sound very exciting, but this contract cost me $1,400 and I really don’t want to take a huge gamble in-case my theory is wrong. I’ve been burned by taking on too much risk initially so in-case we do rally at the open tomorrow I’d like to save some dry powder and add to this position. I will be carefully watching how things unfold and if the TSLA maniacs are full steam ahead it will be best to cut my losses and run! Of course I think I will be on the right side of this trade and my idea may already be playing out. Notice the chart below and the sell-off before the close. TSLA fell from $237-$229. Will this firework explode soon?

tsla2

April 3 update: 

TSLA made a new all time high for the year after announcing the Model 3 but failed to maintain momentum into the day.

tslaytd

On the morning after the announcement I faded the gap up and bought 1 more put option contract at the open when the stock was at $247. This was purchased near the high of the day. My average cost basis went down from $13.95 to $11.3 and my max loss as decreased 23%. I sold one contract rather quickly for $11.75 when the stock first went below $236 (see chart below). This seemed like the logical place to reduce my cost basis since it was close to where I originally entered the trade. Now I can sit more comfortably on my  remaining contract.

tslatrade

You might think my one contract doesn’t inspire a lot of confidence in this trade idea, and admittedly you’d be right. Usually when my confidence is high I will take a heavier position but because TSLA is a hype stock and highly unpredictable I don’t want to bet the farm on this one speculation. However, I am confident that TSLA needs to take a breather and come down. The way TSLA traded the Friday after the big Model 3 announcement strengthens my argument that selling the news is a good risk/reward proposition for this speculative position. If the announcement was anything but baked into the current stock price shouldn’t it have held the gap on Friday, or at least closed above $240? The bulls will argue that strong pre-orders over the weekend, of almost 300K, is the catalyst to pump this stock higher but I’m not buying that as this number  will taper off and and cancellations pickup.

tslaapril12

I may add to this position and will let you know when anything changes!

There have been many articles published on Seeking Alpha about Tesla. Click to image below to see.

seekingalpha.PNG

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