Considering Our Options – $AAPL Oct/ Nov $500 Call Calendar

by CC October 15, 2013 1:15 pm • Commentary

Today AAPL sent out the widely anticipated press invite to their iPad event on Oct 22nd (here), which coupled with what the Street and media are uniformly calling a great hire for AAPL for the open spot to run their retail operations, the stock has gotten back a bit of its mojo and re-taken the important $500 psychological level.  $500 is not just a nice round number, but for the trade that we put on over a month ago in the stock, straddling this strike is of utmost importance for the balance of the week as we are short it in Oct and long it in Nov, and this is the ideal situation for our trade.

With that in mind, let’s look at the possibilities in the structure and how we ant to manage it from here on out. To recap, here’s the original trade:

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

Right now the trade is worth about 12.50 with the stock banging around $500. There’s a little over 4 dollars left in the October calls in decay. That decay will accelerate as we get closer to Friday. As it stands right now those calls decay about 63c a day while the Novs decay about 25c, for a net decay on the position of about 38c today. Again, if the stock were to hang out at or just below 500 for the remainder of the week, that decay difference will accelerate. The main risk to the trade right now is a rip higher in the stock, because any moves higher above 500 this week adds short deltas to the position and can eat away at any winnings from earnings week decay.

Speaking of 500, this is a significant strike from a psychological and options open interest perspective. Two factors that contributed to how we selected our strikes. Right now, the open interest on the line in October is about 60k. To put that in perspective, the 495 line is only about 20k open interest, and the 505 line about 24k. What that means is if there are no sharp moves in either direction due to news out of the company or market news from DC, it’s very possible that the stock could pin at or near the 500 strike into Friday. Dan actually mentioned this possibility in his Morningword today.

In case you’re wondering, I explained how pinning works here.

So we like our odds here of collecting a few extra dollars before we have to make a decision on what to do with the NOV options on this trade. Possibilities on the NOV include continuing to roll the calendar by selling weeklies on the 500 or 510 line. Or spreading the NOV with a higher strike. OR even just closing the entire structure for a nice profit. That all depends on how we feel about the stock’s possibilities to go higher than 500 over the next month. We’ll decide on that course of action over the next few days.