Trade Update – $AAPL : Selling the 1×2 Call Spread for a Small Gain

by Enis December 14, 2012 9:49 am • Commentary

Trade Update Dec 14th, 2012 at 9:50 am:  When we initiated the long AAPL Jan13 1×2 540 / 580 call spread almost 1 month ago, AAPL stock was trading at $528.20 and we were expecting a bounce.  Since then, the stock has bounced and sold off, and is now about 2.5% lower from the level where I initiated the 1×2 call spread.  Even though I’m taking the the trade off for a small gain today, I am disappointed with how this trade has turned out so far because I had expected it to benefit from declining implied volatility when AAPL bounced.  Instead, implied volatility went higher even as the stock went higher, making the trade a much more difficult ride than I had intended.

With the stock looking increasingly at risk of making new lows over the next couple weeks, I’m going to take off the trade today.  The structure is now long delta, and will start to lose money if the stock continues to decline from here.  I wish the stock hung around the 530-550 area a bit longer, but since that scenario looks at risk, I want to take the trade off now.

ACTION:  Sold to Close AAPL ($515.50) Jan13 540 / 580 1×2 Call Spread at $3.50.

-Sold 1 Jan13 540 call at $15.30

-Bought 2 Jan13 580 calls for $5.90


Original Trade Nov 15th, 2012 at 11:39 am:   With AAPL now down more than 170 dollars from its recent high we thought it may be a good time to get a little contrarian. We like a structure here that is similar to the one we did a week ago.

Trade: Bought the AAPL ($528.20) Jan 540/580 1×2 for 3.20

-Buy 1 Jan 540 call for  23.10

-Sell 2 Jan 580 calls at  9.95   for a total of  19.90

Break-Even on Jan Expiration:

-Profits of up to 36.80 btwn 543.20 and 576.80, max gain of 36.80 at 580.

-Losses of up to 3.20 below 543.20. Short stock above 580.

Thesis: AAPL is probably near a point where we will see a near term reversal. This reversal may not be that powerful, and we’re not calling the all clear in the name. But, the stock is starting to get to that revulsion stage where buyers that were long and wrong on the move down are probably puking out some stock here. With that, we’ve seen vol go back up the past few days. This structure takes advantage of a possible reversal by not putting yourself at too much risk for more short term weakness, but being there in case the stock stages a 1 or more day reversal, where vol would come in. It also gives you the chance to make alot of money if a reversal holds and the stock sees levels above 540 for any extended period of time. (it wouldn’t take much of a reversal for that to happen) If the stock simply bases and stays in a range this structure also does well)

An important side note here about why we chose this structure as opposed to an outright call spread (there were other structures we considered, but the cleanest long bet that we use on the site is a call spread).  With AAPL so oversold, it’s rare for a stock to bounce straight higher and never look back from such a condition.  In other words, the first bounce rarely sticks.  With that fear in mind, we did not want to get long a call spread that would put us at risk of decaying if stock bounced up and down for the next couple weeks as it tries to put in a more lasting bottom.  So we chose the 1×2 as a much less risky way of playing for the bounce, without decaying in the interim.