Our AAPL Webinar yesterday ran through our in depth thoughts ahead of earnings.
My personal thoughts when thinking about a trade structure are as follows:
- I think we are close to a longer-term bottom in the stock, based on both fundamentals and technicals.
- Given the nature of the decline over the past 6 months, I expect that the process of bottoming will take some time as stock shifts hands from weak holders to strong holders.
- Implied volatility is likely a sale based on both technicals and fundamentals. The 350 to 500 range is what I’m watching technically, and fundamentally, the stock has discounted a lot of the bad news, but there are few new catalysts on the horizon to get it to rise quickly.
With all of that in mind, I am going to put on a trade similar to the one we discussed yesterday on the Webinar, but with a few adjustments. One quick caveat though – Dan is not doing any trade prior to earnings, and he would likely get involved on a capitulation situation in the stock if it has a high volume selloff to new lows after earnings. I am going to do this trade ahead of earnings because I want to take advantage of high volatility, but even my trade is not much of a directional bet in the short-term. It will not appreciate or depreciate significantly no matter what AAPL stock does tomorrow. But the default case is a slight appreciation, if the stock is unchanged.
Also, given the large amount of premium for one trade, you can also trade AAPL “mini” options, which designate a 10 share position as opposed to a 100 share position. Please be very careful that you are trading the correct line (it should be denoted AAPL7 as opposed to just AAPL), as I made a mistake once myself, trading the incorrect line.
TRADE: AAPL (~$405) Buy June 385 / 435 / 485 Call Fly for $14.75
- Buy 1 AAPL June 385 Call for 32.47
- Sell 2 AAPL June 435 Calls at 10.03 each for a total of 20.06
- Buy 1 AAPL June 485 Call for 2.34
Break-Even on June Expiration:
- Profits of up to 35.25 btwn 399.75 and 470.25, maximum gain of 35 and 435
- Losses of up to 14.75 btwn 385 and 399.75 and btwn 470.25 and 485, with max loss of 14.75 at or below 385 and at or above 485
Trade Rationale: This is a structure that is primarily a short volatility trade rather than a purely directional play. It is only a 0.10 delta structure, meaning the value of the structure will change by approximately 0.10 in value for each $1 move in AAPL’s stock price, all else equal. However, it will move approximately 0.30 for each 1 point change in the June implied volatility of AAPL. So in the short run, the volatility impact will be more significant than the directional impact, for small changes in the stock price. If I expected the stock to move more than the 7.5% implied move, then this is probably not the right structure. But since I view the stock’s downside as limited by its fundamental value and long-term support, and its upside limited by all the previous buyers who are waiting to unload their stock on a rally, I like playing for a rangebound situation over the next 2 months.
This trade’s real appreciation, though, would occur as we approach expiration, closer to June. In the meantime, it’s a low risk way to play for AAPL to stop going down, and for volatility in the stock to subside.