First, let me make it clear that we are NOT executing any of the following trades. Dan will be posting the trade idea within the next couple hours that we find most appropriate for our own portfolio, since we are neither long nor short any AAPL stock at this time. It’s a standalone options idea that fits against our general bearish posture in the market.
However, we wanted to offer a few strategies that looked interesting depending on your position and view in AAPL.
HEDGING LONG STOCK:
We get a lot of questions from readers who are long the stock, and looking for hedging or stock replacement ideas. Here are 2 structures, for those that are long the stock, that make sense to us as good hedges based on AAPL options volatility, term structure, and skew:
1) August 550 / 640 collar, paying $0.70:
- Buy 1 Aug 550 put for 5.80
- Sell 1 Aug 645 call at 5.10
The high in AAPL is 644, so this trade allows for participation up to the year’s high. At the same time, the structure offers protection below 550, an obvious support level. AAPL has only traded below the 550 level for 4 days in the past 4 months. You pay very little premium if earnings is a non-event and the stock does not move.
2) Stock Replacement – Sell Long Stock, Buy Oct 650 / 700 call spread for $10.50
- Sell 100 shares of AAPL stock
- Buy 1 AAPL Oct 650 call for 17.30
- Sell 1 AAPL Oct 700 call at 6.80
This is a way to hedge yourself into this earnings report by selling your long stock, but play for the potential enthusiasm around the next product cycle for AAPL by buying October call spreads. If the stock rallies significantly on a positive quarter, the Oct call spread will be profitable. On a selloff, the Oct call spread will hold up better than near dated options because there is less vol crush, and because October will likely catch the announcements for the next product cycle. Risk reward of almost 4 to 1 on the call spread.
EMPLOYING LEVERAGE TO PLAY FOR UPSIDE:
For those who want to play for a big upside move this quarter, we looked for a structure that would offer the best risk/reward. The July 27th weekly options actually look premium cheap, and offer the best way to purely play the potential upside on tonight’s earnings announcement. Here’s 1 idea:
1) Buy the July 27th expiry 630 / 645 call spread for $2.50
- Buy 1 July 27th expiry 630 call at $4.00
- Sell 1 July 27th expiry 645 call at $1.50
Once again, this trade targets the April highs of 644, risking $2.50 to make up to $12.50 on a move above 645 by Friday. So 5 to 1 risk / reward on the trade. This is the right structure for those who think the earnings move will comprise the bulk of any upside in AAPL over the next month.
Once again, we are NOT trading these structures, but hope the suggestions are useful to you.