Considering Our Options – $AAPL Apr/May Call Calendar

by CC March 25, 2013 12:32 pm • Commentary

Since initiating a slightly bullish trade in AAPL on March 15th the stock is up a little more than 20 dollars and slightly above our sweet spot for the structure. Let’s look at the structure with the stock here and what we’re thinking as far as scenarios and potential exit strategies. To recap here’s the original trade:

AAPL ($440.50) Bought April / May 460 Call Spread for 7.00
  • Sold 1 April 460 Call at 8.00  (30 delta option)
  • Bought 1May 460 call for 15.00  (40 delta option)

Here’s the payout diagram for the trade:

Screen Shot 2013-03-25 at 8.45.39 AM
from TradeMonster

As you can see from the payout diagram, 460 is the sweet spot in the structure and the closer to expiration we get the greater the profit potential for the structure near the 460 strike. Currently the trade is up around a dollar as it has benefited from its long delta as AAPL has grinded higher.

As far as decay goes, the theta on the May 460’s is 17 cents a day and in the April 460’s it is 25 cents a day, meaning the structure gains 8 cents on a day like today assuming no moves in IV or stock price. As we approach April expiration the difference between those two thetas will increase exponentially.

This structure has the added benefit of May catching AAPL’s next earnings while April falls a few days beforehand. This is helpful as it’s unlikely May would get hit from an IV perspective at the same rate that April would if the stock traded in a narrow band. You can see that today in that the April IV is 26 while May is 29. Earnings month vol tends to go to the mid to high 30’s as the event approaches.

What that means is we’re likely to let this trade continue until we get close to April expiration. The greatest risk to this trade currently is that AAPL continues to grind higher to 480 or so in the next week or two and we start to lose the benefit of the decay as the options become more and more in the money. Similar risk exists to the downside as well, obviously.