Well there you have it people, AAPL once again did the “magical and revolutionary.” There it is a new iPhone, which they call the 5, but to my count it is really the 6. In my humble opinion the phone is less than exciting, and is not likely to cause too many iPhone 4S holders to upgrade before their contract is due. With more than 50% smartphone penetration in the U.S. and a very competitive landscape, the opportunity for market share is largely in emerging markets like China. I am not gonna focus on all that fun stuff here, but I am more interested in placing a trade that takes advantage of the recently heightened implied volatility in Sept (regular expiration) as a result of the excitement heading into today’s event. To be fair implieds ramped this week and now are crashing back with the news out, but they are still high given the fact there will not be any new news in the name btwn now and next Friday’s expiration.
Even though the leaks of this phone squashed much excitement from today’s announcement, Apple still has the advantage of their product cycle and form factor change on this phone. Many people sat out the more recent updates with this release in mind, knowing that it would be the more drastic design update. We expect sales of this phone to be good based on the form factor change and the cache of conspicuously having the new iPhone. We also expect talk of disappointment in the event to pivot to talk of that product cycle over the next few days and weeks.
With the event still ongoing, and the likelihood that the stock stays within the expected $20 range btwn now and next Friday, I want to buy an out of the money ratio put spread for a credit, that puts my break-even, or potential loss well below that level. This trade is for fairly sophisticated options traders who understand the risks of being naked short a Put, and are aware of the margin implications of being short a Put in such a high priced stock.
THIS HAS NOT TRADED, I AM OFFERING AT .50, AND I WILL NOT LOWER MY OFFER, BUT THIS WHERE THE TRADE STANDS, I WANTED TO PUT THE NOTE OUT SO READERS HAD TIME TO DIGEST THE THOUGHTS AND THE STRUCTURE. PRICES ARE APPROXIMATE. I WILL POST IF I EXECUTE, THERE IS LITTLE TO NO DELTA IN THE TRADE SO WOULD TAKE A DECENT MOVE TO GET FILLED.
Trade: AAPL ($657.50) Bought the Sept22nd 610/605 1×2 Put Spread for a .50 Credit
-Bought 1 Sept22nd 610 Put for .90
-Sold 2 Sept22nd 605 Puts at 1.40 (.70 each)
Break-Even on Sept22nd Expiration:
-Profits btwn 610.50 and 599.50, make up to 5.50, max gain at 605 of 5.50, pay out trails off btwn 605 and 599.50, stock 610 or higher make the .50credit that you received.
-Losses below 599.50, you are essentially put the stock at 605, but you have 5.50 in gains from the 610 Puts that u are long to mitigate the losses below 605 of being naked short the second 605 Put.
Trade Rationale: The play here is simple for me, I am making a bet that the stock does not close below $600 on next Friday’s expiration. If the stock is above 610, which is down ~7% from here than I collect the premium. It gets a bit more tricky though if the stock is below 610, I will really need to thread the needle on this one and manage my break-even point closely.
The Sept 610 Put has about a 6 delta, the options market is saying that there is only a 6% chance that the option will be in the money next Friday at 4pm. So this trade has a high probability of a small gain.
BUT TO BE CLEAR I AM NOT PLACING THE TRADE TO MAKE THE FULL POTENTIAL OF THE SPREAD, BUT TO COLLECT THE CREDIT.