Name That Trade – $AAPL Turnover

by Dan December 5, 2014 2:19 pm • Commentary

Remember Apple’s (AAPL) flash crash this past Monday? When the stock went from unchanged on the day at $119.25 and dropped to $111.25 in less than a couple minutes, shedding more than $40 billion in market cap:

AAPL 6 day chart from Bloomberg
AAPL 6 day chart from Bloomberg

The stock recovered very quickly, but has traded in a very tight range for the balance of the week.  The rapid movement caused short dated options prices to increase, but as expected have since settled in. But they are still well above the recent lows from last month:

AAPL 1yr chart of 30 day at the money IV from Bloomberg
AAPL 1yr chart of 30 day at the money IV from Bloomberg

Last month on Nov 14th, when AAPL options prices were near the lows I posted on what I thought was cheap protection for long holders (If You Have $AAPL Gains, Read This):

For those who think that trees grow to the sky, and don’t like paying taxes on massive gains late in the year, despite a slight inclination to ring the register, it makes sense to set a stop using what looks to be very reasonable options prices. The one year chart of 30 day at the money implied vol has once again approached the 52 week lows, prior to this week’s pop:

AAPL 1yr chart of 30 day at the money IV from Bloomberg

Options prices look fair to cheap, despite what should be some quiet trading during the holiday season, especially against a long holding in the stock.

So you think AAPL trades higher into year end, and you ain’t selling.  Consider putting a limit order with an expiration date that will lock in a good part of your gains:

TRADE: Against 100 Shares of AAPL long at $114, Buy 1 Jan15 110 Put for 2.20

Those puts have since lost some value, with the stock 1% higher over the last three weeks, the Jan15 110 puts are now worth about 1.45.  But the main point of the trade was to own some sort of protection in the event of a quick unexpected sell off, like we had here last week, and if you were long stock those puts were a decent own when the stock was flash crashing.

Now on the flip side. For longs it could make sense to sell short dated calls and essentially collar your long stock over the holidays.  This time around look to add a little yield.  It is my sense that the one month range of essentially $109 to $120 could be the range for the balance of the year:

AAPL 1 month chart from Bloomberg
AAPL 1 month chart from Bloomberg

With the recent uptick in AAPL options prices, and what could be some range-bound action in a very quiet market, overwrites look attractive.  Once again, this is only for those that are long AAPL stock.

Hypothetical Trade: Against 100 shares of AAPL ($115) Sell to open 1 Jan 2nd weekly 119 call at 1.15

Break-even on Jan2nd weekly expiration:

Profits: gains of the stock between $115 and $119, gains of 1.15 in premium below $119

Losses: losses of the stock below $115 less the 1.15 in premium from the call sale.

Rationale: It’s hard to envision a significant rally above previous highs after the flash crash of last week. There are likely sellers lurking above. That means a sale of an upside call at previous highs makes sense and adds about 1% of yield to the holding if the stock closes the year below 119.