Earnings Options for $AAPL Longs

by CC April 23, 2013 1:40 pm • Commentary

On yesterday’s webinar Enis and Dan went over a few trade ideas in AAPL, both for those looking to play that don’t currently have a position in the name and for those that are currently long the stock. I wanted to go over trades for current longs as the earnings event draws near.

Obviously, alot of people own AAPL stock from higher levels and are hoping for a reversal in fortune but maybe also a little worried about having to make a difficult decision if the stock was to go even lower. Here are a couple trade ideas that can bail you out on the upside and protect you on the downside.



TRADE ONE. Take Advantage of Elevated Implied Vol Ahead of Earnings —-  YIELD ENHANCEMENT

Given the high level of AAPL implied volatility, we prefer trade structures that are net short volatility.  The following trades are both of that nature.

Trade against AAPL long:(~$405) Buy June 425/450 1×2 Call Spread, Collect $0.30
  • Buy 1 AAPL June 425 Call for 13.70
  • Sell 2 AAPL June 450 calls at 7.00 each or 14.00 total

Break-Even Expiration:

  • Collect 0.30 initial premium on the options structure if AAPL at or below 425 on expiry
  • Profits on the 1×2 Call Spread btwn 425 and 450 of up to $25.30, max gain of $25.30 with stock at $450  (added around a 6% yield with stock up ~11%)
  • If stock is above $450 on June expiration, your long stock will be called away at $450, so you have made $45 in the stock from the current level, but you have also made $25 additional from the 1×2 call spread.
  • Think of the trade as a levered over-write, a sort of super yield trade.
  • Losses from the long stock below 405, with a small 0.30 gain from the options structure.

Payout Diagram:

Screen Shot 2013-04-22 at 1.38.25 PMfrom TradeMonster

Trade Rationale:  You would only layer this structure on a long if you had confidence that the stock would go higher after earnings with the possibility for the stock to meet resistance around its prior high. This is a great trade especially for those that stepped in on this last move down and would look to get out on a rally after earnings.

This structure is slightly short delta, so will act as a hedge on a slight down move tomorrow, it will also likely be down money on the options with a big move higher but that will change as we get closer to expiration in June.


Trade Two: Get some downside protection for the chance to get out of the stock on a pop.

Against AAPL long (~405) Sell June 450 Call to Buy June 390/370 Put Spread for Even Money
  • Sell 1 June 450 Call at 7
  • Buy 1 May 390 Put for 16.70
  • Sell 1 May 370 Put at 9.70

Break-Even on Expiration:

  • Stock Profits of up to $45 btwn 405 and 450, max gain of $45 or around 6% at 450 or higher as stock is called away.
    Losses of up to $15 btwn $405 and $390, losses below $370 from stock, but you have made $20 on the put spread, so really you risk $15 of downside btwn $405 and $370 instead of $35

Payout Diagram:

[caption id="attachment_25120" align="aligncenter" width="532"]Screen Shot 2013-04-23 at 11.26.00 AM from TradeMonster[/caption]

Trade Rationale:  You would do this against a long stock position if you were worried about the event risk related to earnings, but did not want to just sell the stock ahead of the event in case the stock went higher.  This trade structure leaves you naked long below $370, but offers some protection on the event and makes it less likely that you would panic on a big move lower. This is not a great structure if you feel this earnings could be the big one that finally turns the stock back to the upside because your gains are capped so close to the upside.