MorningWord 10/29/13: $AAPLs and Options

by Dan October 29, 2013 7:41 am • Commentary

MorningWord 10/29/13:  AAPL’s highly anticipated Q4 results and guidance for Q1 were received last night after the close with a massive MEH.  Throughout our writing leading up the event (preview here, trades below), we repeatedly suggested that the implied move in the options market of about 6% seemed fair at BEST (and the stock would very likely underperform expectations in either direction) considering the fact the company had already pre-announced first weekend iPhone sales, and revenue and gross margin ranges that were at the high end of prior guidance back in Sept.  It was our belief that the stock would trade off of the Q1 gross margin guidance (which mildly disappointed consensus) and is the likely result of the stock trading basically unchanged (at least for now in the pre-market).

Our trade was to sell the implied move, meaning we wanted to have a short premium structure (Adult Swim Trade $AAPL: Selling the Implied Movethat book-ended the range that the options market was predicting.  We were making an explicit bet (with defined risk) that the stock would not have the sort of gap that AMZN and GOOG had to the upside or that IBM had to the downside in the last couple weeks.  As of this moment this looks like the right trade, and if the stock closed unchanged (or up or down a couple %) today from yesterday’s close it would make almost every short dated long premium option trade for directional plays a loser given the massive expected vol crush post earnings.

We spend a lot of time speaking to the best uses of equity options for retail investors….say it with me….yield enhancement for longs, leverage for best ideas and most importantly risk management.  The rest of the stuff you want to do with options, the punty stuff, the lotto tickets etc,  you might as well head to Vegas and get the free drinks at the tables, as it is likely more fun and just as unprofitable.

We laid out a couple strategies yesterday in a Name That Trade post ($AAPL: Options Overlays That Add Potential Yield & Leverage For Longs) for long holders that would add yield to their positions taking advantage of the high implied volatility into the earnings event.  Both structures, a one by two call spread for zero premium, and an at the money straddle sale, are exactly the sort of trades that generally long only investors should be using options to enhance returns.

And lastly to be fair, we didn’t even detail a risk management structure like a collar or consider stock replacement as frankly we didn’t see too many disaster scenarios given the new found interest by some fancy hedgfunders, who have likely put in a near term bottom in the stock somewhere just below $500.

The purpose of this post is to walk readers through our mindset heading into to the event,  as the real learning process happens after the event…..figuring out why you chose to do what you did and why the trade worked or didn’t work.  We will be sure to update the trade structures that we detailed today once the stock settles in, but to recap:

TRADE: AAPL ($529) Sold Nov 16th 500/490– 565/575 Iron Condor at $4.00

AAPL Sold Nov 16th 500/490  Put spread at 2.50

  • Sold 1 Nov 16th 500 put at 7.50
  • Bought 1 Nov 16th 490 put for 2.50


AAPL Sold Nov 16th 565/575 Call Spread at 1.50

  • Sold 1 Nov 16th 565 call at 5.65
  • Bought 1 Nov 16t 575 call for 4.15


First Trade Overlay: Against 100 Shares AAPL Long at $528- Buy Dec 570 / 600 1×2 Call Spread for Even $

-Buy 1 Dec 570 Call for 9.50

-Sell 2 Dec 600 Calls at 4.75 each or 9.50 total


Second Trade Overlay: Against 100 Shares AAPL Long at $528 – Sell Nov1st 530 straddle at $31.80

-Sell 1 Nov1st 530 put at 15.00

-Sell 1 Nov1st 530 call at 16.80