3rd Trade Update AAPL: Managing Short Iron Condor on Weekly Expiration

by Dan April 27, 2012 3:16 pm • Commentary

3rd Trade Update April 27th, 2012 at 3:20pm:  I have gotten a couple questions on this and want to clarify before the 4pm close.  The question is what to do with the Short Apr 27th weekly 525/520 – 585/590 Iron Condor with the stock at $602?   

The Put Spread will expire worthless, thus u received the 1.25 in premium for originally selling the spread, and the Call Spread will expire worth 5.00 with the stock above 590, but u have taken in the additional 1.25 of selling that spread,   So your loss will be the difference btwn the premium that u received (2.50) for selling both spreads, and the width of the call spread ($5) that is in the money and a loser, so a loss of 2.50.  You do not need to close the position as the short Apr 585 call is covered by the long Apr 590 call.

Unfortunately the original trade that I laid out last Friday in a post on the site and then on Options Action;  Sell Apr wkly 620/610 Call Spread and Sell the Apr wkly 545/535 Put Spread for Total of $5.30, this would be a very nice winner for the full amount of premium sold with the stock at $602.50 with less than an hour to go to weekly expiration.  Timing is everything, and in this case I outsmarted myself.


2nd Trade Update April 25th, 2012 at 2:25pm:  AAPL has found a bit of a home up about 8.5% at $609, trading about $9 below the morning highs…..I think the stock’s close could be fairly telling for the next few days trading in the name…..Waking up this morning and seeing the reaction to what was universally deemed a blow-out qtr is somewhat surprising that the stock is outperforming the implied move this much.  Fear peaked in the name at some point on Monday when implied volatility started to quietly come in, and then actually get nailed yesterday afternoon.

When I originally laid this trade out Friday afternoon, I was apprehensive to put the structure on as I thought the stock would continue to be volatile right up into the earnings report and thought wrongly that implied vol would stay bid.  Ironically the original trade that I posted on Friday (TRADE: AAPL ($574) Sell Apr wkly 620/610 Call Spread and Sell the Apr wkly 545/535 Put Spread for Total of $5.30) was the right one.

I was very happy to hear from many of you who used this discussion to structure your own trades, some using different strikes or expireys and some using bits and pieces of the inputs to inform other trades.  This is really the main point of the site.

As for the trade that I put on yesterday afternoon, ( AAPL ~$556 Sell Apr wkly 585/590 Call Spread and Sell the Apr wkly 525/520 Put Spread for Total of $2.50) this trade is in a tough spot, and I am likely to lose the 2.50 in premium that was at risk.  The real problem with this trade is that volatility came in too much and I didn’t do a great job of adjusting my strikes, and the greater than expected implied move is what did me in.

I was focused on a risk reward relationship where I risked 1 to make 1 on a generally high probability bet.  If I had broadened out the strikes a bit I would have had greater probability of success but I would have been risking lets say 3.50 to make 1.50 on the 600/605 – 515/510 Iron Condor, and that just didn’t seem worth it.

SO at this point I sit and wait for the next 2 trading days and see if the stock comes in to the 585 level and at that point will look to recapture as much premium as possible, but at this point the Apr weekly 585 Put is a 7 delta option, so not very likely.

I wouldn’t be surprised if AAPL closed the week at $600 which is almost the exact mid point of the peak to trough range of the last 2 weeks ($644 to $555)…..that still won’t help my trade.


TRADE UPDATE April 24th, 2012 at 2:30pm:

With AAPL down about 2.8% on the day at ~$555, the APR wkly 555 straddle is offered at 37.25, only implying now about a 6.5% move from earnings down from almost 7.5% days ago. This vol compression has hurt the attractiveness just a tad of the Iron Condor sale I laid out on Friday.

For Instance, If I were to use the same break-even levels as I used in Friday’s Post, i would only be able to get about $4 in premium for selling two $10 wide vertical spreads. That is not a great risk reward in my opinion.

At this point with the stock a bit lower, I want to adjust the strikes and actually narrow them a bit and risk less capital, with the trade off of potentially making less:

NEW TRADE: AAPL ~$556 Sell Apr wkly 585/590 Call Spread and Sell the Apr wkly 525/520 Put Spread for Total of $2.50

-Sell the April weekly 585/590 call spread for ~$1.25,   and

-Sell the April weekly 525/520put spread for ~$1.25

Break-Even on April 27th Expiration:

-Profits If stock is btwn 585 and 525, max gain of 2.50

-Losses of up to 2.50 if stock is btwn 522.50 and 520 or btwn 587.50 and 590, Max loss of 2.50 if stock is above 590 or below 520

As Always It makes sense to use limits in multi-leg orders and in this case with the stock whipping around keep your eye on a range where your break-evens make sense.  The more premium that you receive to put this on the more risk you have in the event of an out-sized move, that is way I want to target a range in between the avg move and the implied move.

Original Post April 20th, 2012:
Here is a quick preview of what I will be discussing tonight on Options Action on CNBC at 5pm: AAPL: Just Spotted, the Very Rare Cupertino Condor


Original Post:
Here is a quick preview of what I will be discussing tonight on Options Action on CNBC at 5pm:

EVENT: AAPL will report their fiscal Q2 earnings on Apr 24th after the market close.

-Implied move in the options market almost 7%, vs ~4.25% avg move over the last 4 qtrs.

MY QUICK TAKE ON AAPL’S RECENT VOLATILITY: The fever appears to have broken, investors have gone from climbing all over each other to buy shares to relentlessly selling shares over the last 9 trading days (stock has been down 7 out of the last 9 days since making all time highs Apr 10th. It also appears that a little sanity has taken hold as investors have chosen to trim positions, possibly on the heals of generally lackluster earnings guidance from a few large tech bellwethers, to fear that the company could have a similar miss to their Sept qtr that saw push out in demand in front of iPhone 4s, as we get some color on the new iPad launch.

Historical, Implied and Skew:

April27 weeklies (yellow) are flying high with vol in the 60’s. That should get even more jacked going into the earnings on the 24th. May (green) is also quite high, in the upper 40’s:

AAPL, monthly vol skew from LiveVol Pro

The implied vol (red) we’re seeing in near term options is actually pretty high historically, it’s been climbing steadily going into this earnings, but, so has the actual vol (blue) in the stock as AAPL has sold off it’s parabolic highs:

AAPL IV vs HV from LiveVol Pro

So all in all vol is pretty rich, but the stock has been whipping around.

MY TRADE: I want to sell the move, but in a defined risk fashion, I want to sell a strangle in the weekly options but covering my tail by buying a further out strangle. This strategy is called an Iron Condor for those who haven’t used one or maybe even heard of one….it sounds a bit intimidating, but it is really as simple as selling 2 spreads with defined risk, in this case I will be selling an out of the money call spread and selling an out of the money put spread.



TRADE: AAPL ($574) Sell Apr wkly 620/610 Call Spread and Sell the Apr wkly 545/535 Put Spread for Total of $5.30

-Sell the April weekly 620/610 call spread for ~$2.70,


-Sell the April weekly 545/535 put spread for ~$2.60


Break-Even on April 27th Expiration:

-Profits If stock is btwn 545 and 610, max gain of 5.00

-Losses of up to 5.00 if stock is btwn 540 and 535 or btwn 615 and 620, Max loss of 5.00 if stock is above 620 or below 535