Name That Trade – On $AAPL Watch

by CC October 20, 2014 1:51 pm • Commentary

Earlier, Dan wrote a thorough preview of today’s earnings release from AAPL. We’re not going to trade the event ourselves but I wanted to go over some option strategies for those that are long the stock or those that want to play the event with defined risk.

For those looking to hedge long AAPL shares we would suggest a simple near term strategy that takes away most of the risk from the event itself:  

Hypothetical Trade versus 100 shares of AAPL long:

TRADE – Buy the AAPL (99.30) Oct24th 96 puts for .92

This is the simplest event protection in the form of a put that caps the downside to a few percentage points and costs less than 1% of the stock. If you did this protection trade every quarter into earnings it would probably expire worthless most of the time and cost you a few percentage points each year. However, that would pale in comparison to the ability to hold the stock for extended periods of time and the gains that would be realized in being able to stick with the stock through the reports. And with the stock near all-time highs that becomes even more important, especially if you are someone the added shares recently.


Hypothetical Long Delta Trade:

TRADE: Buy the AAPL (99.30) Dec 100 / 110 Call Spread for 2.85

If you are someone that wants to own AAPL up here but have been nervous about adding it to your portfolio near the highs (as you should be) one way to get long exposure into the Holiday season and the release of several of their new products is to look to define risk with break-even very near the prior highs. This simple vertical has a breakeven of 102.85 and has the potential profit of 7.15 with only a few percentage points of risk to the downside when compared to buying stock here.


Hypothetical Short Delta Trade:

TRADE – Buy the AAPL (99.30) Nov 100/90/80 put fly for 2.50

Similar to the hypothetical long, if playing short it’s best to define the risk to a few percentage points of the stock. One way to do that is target support below with a slightly in the money fly. If AAPL does sell off on earnings it’s likely to find support in the $87-$90 range. This fly targets that area. The most that can be gained is $7.50 but if the idea is entirely wrong and AAPL breaks out the most that can be lost is 2.50.


Hypothetical Range Trade (Fading the move, playing for $100 pin action)

TRADE – Buy the AAPL (99.30) Dec 90/100/110 call fly for 3.70

After the 7-1 split in the shares coinciding with the psychologically important 100 level AAPL has spent the last couple of months in a very tight range around that $100 strike. It’s entirely possible this realized vol compression continues for the rest of the year. This structure plays for that with an almost 3-1 payout profile. We’d probably do this trade is a similar payout existed in the November options but it doesn’t as the same call fly there is nearly $5. We like when these set-up for about 3-1 and are only a month out, so the December play just seems like too much time to risk 3.70. Condors seem even worse as the plays like 90/85 put spread vs 110/115 call spread sales are just too dollar cheap to bother with that many strikes. The fact that these aren’t that great is a direct result of implied volatility being historically low. The vol is probably right but that gives fading the move a high degree of difficulty from a risk reward standpoint.