Update: SWN short play

I spoke about a possible short position in SWN back in March on MSW and highlighted the chart analysis on this blog: SWN a Short?

I said: “The short position or put options can be placed (or bought) right now but I must warn that oil is still trading above its respective 200-d m.a. Unless oil cracks $60 and breaks below its own moving average, this play may not work out. If you initiate the position, make sure you use the correct position sizing techniques and protect yourself from a move to the up-side.”

Two things happened: oil didn’t violate $60 and is still above $70 a barrel and SWN was immediately in the red on my put options. Looking at my trade journal, this is what I wrote for the position:

“3/15/06: SWN Sep, 2006 35 put, shares price: $31.18, option price: $6.20, looking for moving average breakdown or drop to $20”

Monday’s price closed at $25.88 (with the options trading at $9.60 per contract), its lowest level in a year (the stock did exactly what I anticipated over the six month stretch even though it looked like a bust during the first few weeks). If this was pure stock short, I would have covered when it went against me but I never sold the options due to the longer term outlook I took (6-month window). As many of you know, I typically purchase options for stocks in the $60-$100 run with a 9-12 month time frame (many of these options double or triple within the first few months and I close the position long before the 12 month expiration). Tenaris was a great example as I closed the options above $37 (from $12) and then went on to watch them soar to $97 per contract.

This position is one bright spot for me in the midst of everything happening in the weak market environment. These contracts are now showing a 50% profit so I will start to contemplate scaling out of the contracts and locking in gains today.

Piranha