Considering Our Options – $AAPL: A Hundred Ways to Decay

by CC October 7, 2014 1:04 pm • Commentary

Back on September 16th we entered into a bearish position in AAPL with the thought that the stock could stall at recent highs and there could be some selling in the stock if it were to break the 100 level that it has hovered near recently. To recap, here was the trade and rationale:

TRADE: AAPL ($99.60) Bought Oct 31st 100 Put for $4.20

Break-Even on Oct 31st Expiration:

Profits: Below 95.80

Losses: between 95.80 and 100 lose up to 4.20, lose full 4.20 above 100

Rationale:  Oct 31st weekly will catch the company’s fiscal Q4 results and forward guidance, which aside from next week’s press release stating total iPhone units sold, this will be the next big catalyst.   I will look to sell a lower strike put on a move lower in the stock and create a vertical put spread.  While I am defining my risk, I wull also look to keep a tight leash on this trade and possibly limit to a 50% loss in premium.

Since we initiated the trade Apple has basically gone sideways as the 50 day moving average is now just below the psychologically significant level of 100. It’s been acting like it’s pinned to 100:

Screen Shot 2014-10-07 at 10.53.54 AM
AAPL 6 month from LiveVol Pro

The good thing for our trade is one significant test of the 50 day moving average (right now 99.30) could be enough to get this thing down a few dollars in a straight line. However, if it holds once again it may be the type of thing we have to take our medicine in. Right now with the stock essentially flat from where we opened, the puts have lost about a dollar in value which has come almost entirely in the form of decay, as implied volatility is actually a few points higher than where we bought.

The fact that the puts catch earnings helps in that that vol should continue to creep higher, offsetting some of the decay, but we can’t wait forever. We’re going to give this one more shot of breaking the 50 day moving average, and if it doesn’t do that we’ll likely close for a small loss. If it does fail we may spread or simply close for a profit depending on what the rest of the market feels like at the time.