Trade Update: On Friday I closed the Oct/Nov 500 Call Calendar that I was long for more than a double and rolled a portion of the proceeds into a Oct 25th / Nov 1st 515 call calendar looking to sell this weeks iPad event (tomorrow), hopefully having the stock consolidate a bit of its recent gains and set up to own the Nov 1st weekly 515 calls for their earnings event Oct 28th.
Well here is the thing, the stock is surging this morning, and approaching a break-out to 10 month highs, and in hindsight my trade might have been just a little too cute, too tight on expirations and too tight on the strike. But here is the thing, with the stock up almost 2.5% the trade that I put on Friday is still profitable, but if the stock were to continue to run into tomorrow’s event it would quickly turn to a loss. I am going to close for a small gain and look at other trades after I get a sense where this thing may pause. I don’t want to turn what started out as a marginally bullish trade into a bearish one as the calendar is quickly becoming short deltas.
Action: Sold to Close AAPL ($522.70) Oct25th/Nov1st $515 Call Calendar at 8.50 for a 1.05 gain
I hate closing so quickly but even-though trade is a small winner I am wrong on a few key aspects of the trade that could render it a loser if the stock were to break-out.
Original Post Oct 18th, 2013: New Trade $AAPL: iPad and Earning Events, An Options Trader‘s Delight
Earlier today I closed an AAPL Oct/Nov 500 Call Calendar at $11.80 (here, stock ref $508.80) that I bought for $5.30 when the stock had dipped down to $$467 following their early Sept iPhone event. The trade isolated the $500 level as it seemed like a logical resistance level prior to the company’s fiscal Q4 earnings due on Oct 28th.
I want to now look at the upcoming events in the stock. First AAPL will hold a media event next week on Tuesday Oct 22nd where they are expected to announce new iPads for the holiday season. Expectations have ranged from new shapes, better screens and most likely a finger sensor. My sense is that these products will likely be viewed similarly to the iPhone 5s and 5c, as evolutionary, but I do not expect to see the same 10% sell off that the stock had back in mid Sept following the smartphone launch event.
The options market is implying about a 2% weekly move for AAPL, which given the event seems pretty fair. On Oct 28th the company will report their fiscal Q4 earnings, and this will likely remain the main event for the stock, the so called make or break for the balance of the year. The options market is implying about a 4.25% move, which I would expect to increase a bit over the coming week, especially when you consider the fact that GOOG has gained almost $45 billion in market cap just today. With better than expected news on the earnings front I suspect AAPL will get back to unchanged on the year ($532) and possibly make a run for the 2013 high of $555.
With that in mind I want to be long for the earnings event, but by selling the iPad event to help finance. Here’s the trade:
TRADE: AAPL ($508) Bought the Oct25th/Nov1st $515 Call Calendar for 7.45
-Sold 1 AAPL Oct25th 515 Call at 3.62
-Bought 1 Nov1st 515 Call for 11.07
Break-Even on Oct25th Expiration:
-Profits are maximized at 515 on Oct 25th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is $7.45
Trade Rationale – It’s very possible AAPL sets up at either $500 or $520 going into its earnings event. Without a game changer in the iPad event, the stock should stay beneath the $515 line. This structure eases some of the premium risk for the Nov1st expiration which catches earnings. Ideally, we’d like to see the Oct25th calls expire worthless and have a very cheap upside call for earnings, which I will likely look to spread prior in an effort to further reduce my break-even.