New Trade – $AAPL : Getting Long Delta with Call Spread

by Enis November 16, 2012 10:35 am • Commentary

Like everyone, we’ve been watching AAPL’s freefall and wondering at what point it reaches at least a near term panic sell bottom. 522 was the potential double bottom low, and seemingly like every other level on the recent way down, it held for less than 24 hours. It’s tough to say exactly where the AAPL selling will end completely, as so many shares are held by big funds, but we do feel it could be near at least a near term reversal point. With that in mind we were looking for a fairly low risk way to play for a potential reversal:  

Trade: Bought the AAPL ($518.50) Dec 525/545 call spread for $7.70

-Bought 1 Dec 525 call for 19.05

-Sold 1 Dec 545 call at 11.35

Break-Even on December expiration:

Profits above 532.70, max profit of 12.30 at 545. Losses up to $7.70 between 532.70 and 525, max loss of $7.70 below 525

Rationale and Expectations: This is not a trade that we would likely hold for too long on a reversal, and will likely keep a tight stop if the reversal doesn’t come. We’ll be looking for a reversal up day or 2 and likely take any profits at that point. The sentiment has gotten so bad in the stock, and we’re seeing more and more national coverage of the stock’s fall, which tends to be a contrarian indicator in such widely held names.

Yesterday we traded the 1×2 because we were not sure if AAPL was at a bottom.  Now with the stock closer to the all-important $500 level, the outright “long delta” trade makes more sense here.

Volatility: If AAPL were to reverse or even start to base down here, volatility is likely to come in several points. This is another reason not to hold a long premium trade like this too long if it initially proves to be correct directionally.