Today, let's dissect a trade I took two weeks ago after Equifax (EFX) reported a cyber security incident potentially impacting 143 Million US customers which took place supposedly on July 29th 2017 and was officially reported early September.
In this blog post I'm going to walk you through my thought process on why I considered this as a good bearish bet and how I structured my trade so in future if you come across a news or an event with such magnitude and impact you too can act accordingly if you didn't participate this time around.
As mentioned above, on September 7th 2017, Equifax made the announcement regarding the breach and it was immediately all over the news and price fell a modest 5% after hours.
My initial reaction was, "WOW! this is massive!" but the market still couldn't comprehend the magnitude and the impact of the breach as reflected by the 5% after hours price drop because I was expecting 10% or 15% drop.
Few things that went through my mind.
- Given that this is a credit reporting agency, they record and maintain everything that's require to personally identify an individual (an adult over 18) which is almost half of US population.
- Once the data is out into the wild, it's an irreversible damage and treasure trove for cyber criminals. They can use this information years and years from now to open lines of credit, create fake IDs, harvest more personal information etc.
- This isn't the first time they've been breached either so it looked like the company didn't take security seriously.
- I figured if anything, there would be law suites and federal investigation nonetheless.
Despite the company had a pretty decent fundamentals and the stock has been on a bull run since 2012, I thought there is a big unknown in terms of the extend of the damaged. Take a look at the chart below.
I thought the $15 drop from mid $140s a day after the announcement was pretty significant. As many in social media shouted #BTFD I wasn't buying any of it. I came to the realization that the news is going to continue to unfold moving forward and people are going to be mulling and debating this over the weekend to fully understand the extend of impact.
So I came to the conclusion that this security breach was unlike any other given the magnitude of the breach and the sensitive information compromised during the process and no one knows the extend on damage it can do to the company.
This was the theory that I based my trade upon. As few weeks have progress, you can see more and more news are unfolding not limited to -
- Customers outside the US including Canada and UK were also impacted.
- FBI opening up Criminal Investigation Into Equifax Breach
- Two congressional hearings scheduled.
- DOJ investigation for insider trading
- Undisclosed system breach from March uncovered
- Many angry states could impose their own rules/laws such as no credit monitoring fees.
- Congress considering legislation to provide free credit freeze to consumers which hurts agencies revenue.
- There could be more things that I could have missed
Structuring the Trade
As I have a bearish view on the stock, I planned to take short position but didn't really wanted capital tied up into one stock as this is a higher price stock. I normally trade stocks between $20 - $60. So my next choice were options.
After looking at the bearish put options chain and price action on Friday (09/08/2017) day after the announcement, I bought 2 at the money January put options contract that were priced at $9 each for a total of $1,768 as you can see below. This way I gave myself plenty of time for the trade to play out or as I assumed more bad news would be uncovered. Implied Volatility (IV) was around 62% and had a Delta over (.60). If I were to straight up short this stock (4 contracts = 400 shares) I would be tying up $400 x $120 = $48,000 which I didn't want to do.
The rest of the trade management is well explained through my social media posts.
I covered (sold puts) half of my positions i.e. 2 contracts at low $90s as it was a decent support on the weekly chart (see above where price bounced twice from $90) so I assumed it was a good first target to take profit. I netted roughly 3.2x my initial investment with this cover.
I'm currently holding the remaining two contract and plan to let the houses money work for me. I'll be using low $100 as my stop guide.
Opportunities like EFX come once in a year. Always keep your eyes/ears open, think and react accordingly. Could I have risked more and taken a bigger position? Sure but everyone has their own definition of risk and time horizon. What if a news came out over the weekend where authorities have caught the hackers and data were not distributed over the internet? EFX would have rallied like it's no ones business. I always like to bet with the assumption that anything is possible.
That's it for now folks. I hope you found this blog post informational. Happy and profitable trading for the remaining of the week.
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