Friday on Options Action I officially closed out of my AAPL Sept Call Spread Risk Reversal that I suggested buying on the site (here) when the stock was $360 and on the show July 15th, 2011. I also suggested that I want to roll this position up and out and look for a better risk reward scenario, well, I think i have it…..
July 22nd, 2011
MY VIEW:
My thesis from a couple weeks back still stands and if anything the company’s performance in their fiscal Q3 should give more confidence that the stock is very likely to not only hold this years lows for the balance of 2011 but close on the highs. Given the expected iPhone5 refresh, plus possible iMac and iPod refreshes in the coming months, coinciding with back to school and then the holiday season, all systems should be a go.
I say this with my normal CAVEAT: DON’T BUY STOCKS ON A RUNAWAY BREAKOUT, WAIT FOR THEM TO CONSOLIDATE, OR BUY ON A PULLBACK. The herd mentality will want you to buy when everyone else is, but patient investors are often more profitable. I will offer trade suggestions for EXPERIENCED OPTIONS TRADERS TO TAKE ADVANTAGE OF MOVES BOTH WAYS BETWEEN NOW AND SEPT EXPIRATION.
The stock is currently trading around $400 for the first time ever during a regular trading session (traded above $400 the night of earnings last week, only to open $10 lowers the next morning).
If you want to gain long exposure for what could be plenty of catalysts in September consider defining your risk (or most of it) using options, detailed in the first trade example……
I DO BELIEVE THERE ARE 2 POTENTIAL NEGATIVE CATALYSTS THAT COULD CAUSE THE STOCK TO DIP BACK TO $370 NEAR TERM; 1ST A PUSH OUT OF iPHONE 5 & 2ND STEVE JOBS ON PERMANENT LEAVE….both moves likely short lived though given current guidance for fiscal Q4.
The Catalyst for a push through $400 would be the press announcement of a media event linked to iPhone for early Sept…….this usually comes 7 to day days before the event which would likely be after Labor Day.
TRADES I AM CONSIDERING:
**THE FOLLOWING STRUCTURES ARE FOR EXPERIENCED OPTIONS TRADERS AND THOSE WILLING AND ABLE TO BE NAKED SHORT
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1st TRADE BREAK-OUT TO NEW HIGHS BY SEPT EXP: AAPL ($400) Buy Sept Call Spread Risk Reversals for Even Money
-Sell Sept 370 Put at 5.00
-Buy Sept 410 call for 10.70
-Sell Sept 425 Call at 5.70
Break-Even on Sept Expiration:
Base Case: Btwn 370 and 410 no loss as the structure has no cost other than transaction fees.
Upside: btwn 410 (up 2.5%) and 425 (up 6.25%) make up to 15.00 425 or above make full 15.00 or almost 4%.
Downside: worst case stock 370 (down 7.5%) or below and you suffer loses and the risk of being Put the stock.
TRADE RATIONALE: this structure should be considered by new longs who want to play for new iPhone but worry about potential risks for the stock to pull back, if for some reason the news is not what is clearly expected in the market. Or if you have been long and want to be there for the potential event consider selling some and replacing with this sort of structure.
-Also the stock has a history to run into announcements and sell on the news. Trade management will be of utmost importance as you will want to cover the Sept 370 Put as the stock rallies and cover your wings.
-Technically the stock’s almost 30% rally in a month clearly reflects a lot of good news and I want to be careful not buy on a spike.
[caption id="attachment_3438" align="aligncenter" width="300" caption="1 Yr APPL Chart provided by Bloomberg LP"]
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-Frankly I got a bit of push back 2 weeks ago when I suggested this structure on the TV show as there are significant inherent risks in selling puts, especially in high flier names, what comes up must eventually come down. I couldn’t agree more with the risks, AND THIS STRUCTURE IS NOT FOR EVERYONE. There are significant margin requirements in selling puts naked and it takes discipline to size the position appropriately…..because of the use of leverage often times traders buy more premium than they would in an equity position because they feel they are defining their risk. But on the flip side on short premium trades, specifically naked ones you have to be cognizant of this fact as you could face sizable margin calls.
-I guess the reason i am most comfortable with being short puts in AAPL is if there was ever a stock to do it in it would be AAPL…..they have $76 billion in cash and marketable securities and no debt, that is almost a quarter of their market cap.
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2ND TRADE NEAR TERM CONSOLIDATION PLAY THROUGH AUG EXP: AAPL ($400) Buy Aug 390/ 380 1 X 2 Put Spread for .50 credit
-Buy 1 Aug 390 Put for 5.90
-Sell 2 Aug 380 Puts for a total of 6.40 (3.20 each)
Break-Even on Aug Expiration:
Profits: stock 390 or higher and take in the .50 premium that you collected.
-btwn 390 and 380 make up to 10.00 plus the .50 premium, btwn 380 and 370 profits trail off dramatically.
Worst case: stock below 370, down 7.25% and you are put the stock, essentially at 380, but you have $20 in profits from the Aug 390 Put you are long and the .50 premium that you collected to net against the 2nd Aug 380 put you are short.
TRADE RATIONALE: If you are of the mindset that the stocks 30% move in a month could see some resistance at the $400 level and it would be healthy for the stock to consolidate then look to zero premium ways to capture a 3- 5% re-tracement before what could be a rally into late August announcement of iPhone5 media event.