Considering Our Options – $AAPL Call Calendar

by CC September 23, 2013 10:11 am • Commentary

AAPL is higher today on news of great opening week sales of the new phones. From CNBC:

Apple announced on Monday that sales for its new iPhone had set a record, with consumers snapping up nine million smartphones within the first few days of its launch, allowing the company to hike its revenue guidance.

The tech giant said in a statement that the iPhone 5s and 5c gangbuster sales were accompanied by more than 200 million downloads of the iOS 7 platform, Apple’s new iteration of its operating software.

As a result, Apple said company revenue for the fourth fiscal quarter would be “near the high end” of its previous guidance of $34-$37 billion. Gross margins would also check in near the top of its prior guidance of 36-37 percent.

Playing contrarian to the dismal expectations and sentiment was sort of the idea behind our current trade. Dan reiterated his feelings on the stock and company last week on Fast Money:


And here’s the trade we put on on 2 weeks ago:

Trade; AAPL ($467.50) Bought Oct/ Nov 500 Call Spread for 5.30
  • Sold 1 Oct18th 500 Call at 5.80
  • Bought 1 Nov 500 Call for 11.10

Today, the trade is worth between 7 and 8 dollars depending on where it closes. So what are we looking for now?

In hindsight, when AAPL got slammed down below 450 we should have covered the Oct call. We thought about that and I’m not sure why we didn’t pull the trigger as that call got down to about $2. But since we didn’t, we’re left with a trade where we have to wait around a little longer. At this point, this is largely a play on the faster rate of decay of the October calls versus the November calls. Currently, the theta (decay) on the Oct line is -.27 and the Nov line -.19. That means the position collects about 8c today all other things the same. That collection of decay increases (exponentially) the closer we get to October expiration and the closer we get to 500 in the stock.

We still feel that 500 will act as resistance, but even if it doesn’t a move higher will still be good for this position as we have alot of room above 500 where this trade still does well.

The other big factor on this trade is Vega. The implied vol in October is 26 and the IV of Nov closer to 30. With November catching AAPL’s next earnings report, Nov should continue to stay bid (particularly with the heightened expectation after today’s iPhones blowout number), while October should see some sellers if the stock manages to settle in near 500.

Due to all these factors, we’re sticking with the position and are looking for the position to do well over the next few days and weeks. We’ll revisit the trade only after a big move away from 500 or if it’s become a big enough winner near 500 that it’s worth taking money off the table.