Dissecting Our Apple (AAPL) Trades

by CC September 30, 2011 11:03 am • Commentary

I wanted to take a moment to go over the AAPL trades we’ve done on the site for the past couple of weeks. The trades have turned out very well, and part of the reason has been disciplined trade management in a crazy market. We can use these trades as a good lesson for future trading.

First let’s look at the original trade:

AAPL ($393) BUY NOV 405 / 425 Call Spread for 7.10, Finance by Selling Nov 350 Put at 7.10

-Buy Nov 405 Call for 15.40

-Sell Nov 425 Call at 8.30

-Sell Nov 350 Put at 7.10

This trade could be put on for even money because it used a short downside put to finance an upside call spread. This is slightly different structure than most of the other trades we recommend on the site but we think AAPL is a slightly different kind of stock than others and wouldn’t recommend it for most companies. (Picture being short a put like that in different kind of stock like NFLX for the past month)

Since we were short that put we wanted to stay very active in this trade from a management situation. This is not the type of structure you put on then not think about until expiration, you have to actively manage.

So we did. When AAPL rallied we covered the short put that we sold at 7.10 for 4.25. A nice profit of 2.85 on that strike alone.

At the same time we sold half of the call spread that we bought for 7.10 at 10.55, and left half in case the stock went higher.At this point we’ve guaranteed making money on the trade, we paid nothing, locked in profits and have no tail risk on the open  put anymore.

It turned out that holding onto the last half of the call spread didn’t make more money from that point, but still made money. When sentiment started to change in the stock we sold the balance for less than our first sale, but still at a profit from where we bought it. We sold the balance at 8, we had paid 7.10 originally.

We then got bearish on the stock as the iPhone announcement went from rumor to news, and we felt there could be some downside pressure on the stock near-term. We introduced a new bearish trade:

Buy the Oct7 380/370 Put Spread for 2.00

-Buy Oct7 380 Put for 5.00

-Sell Oct7 370 Put at 3.00

Break-even On Oct7 Expiration:

Profits btwn 378 and 370, max gain below 370 make 8.00

Losses: btwn 378 and 380 lose up to 2.00, above 380 lose full 2.00 or less than 1% of the underlying.