Following AAPL’s better than expected earnings and the pop in the stock back near all time highs we detailed a nice risk/reward set-up that we said wasn’t for everyone, but for those that liked the set-up over the next few weeks for AAPL to possibly pullback after matching the highs. There were two thoughts on how exactly to go about that. The first was to wait for the stock to match those previous intraday highs (119.75) and the second was to do it after the initial gap with the thinking that if we missed it that day we might not get another shot. We placed the trade the day of the initial pop and initially it looked like our timing might work. But since then the stock has grinded higher towards those intraday highs made on 11/25/14. The closing high was the next day at 119.00. Both those levels are important here because we’re about to get a confirmation on the stock as its above that previous closing high and very close to that intraday high. So what now?:
With the stock at 119.40 our structure is worth about 1.80. We paid 2.50. The 117 strike isn’t far away and the structure is currently about 30 deltas. But above 120 in the stock the risk reward of holding changes. We won’t let this become a total loss if the stock does confirm a breakout here. On the flip side, if the stock does pull back from this level today or in the next few days we’ll try to be patient with it as 115 and below would be very realistic especially if the market can’t hold the 2000 level in the SPX. (although, AAPL is feeling a bit like a safety trade the past few days, so that’s another thing we’ll be keeping an eye on.)
Translation of all that: A breakout above 120 means we’ll pull the plug and look for a better entry higher. If sellers emerge here and the stock closes lower we’ll see how that plays out and hold.
Earlier I gave a few anecdotal thoughts on AAPL’s Q1 results and Q2 guidance and some thoughts on the true believer mentality of retail investors. There was nothing about the report that said SHORT, but the price action leading up to the results, and the potential for a failure at the prior highs could offer an interesting trade set up. This trade idea is not for everyone, and to be fair, we did offer a handful of ideas yesterday for existing longs and direction traders (here and here). But this trade is for those who think investors take profits at resistance, and the stock retraces some of the run to prior highs over the coming weeks as investors contemplate the potential of a “as good as it gets” set up:
AAPL ($117.75) Bought Feb 117/107 put spread for 2.50
-Buy to open 1 Feb 117 put for 3.05
-Sold to open 1 Feb 107 put at .55
Break-Even on Feb expiration:
Profits: between 114.50 and 107 make up to 7.50, max gain of 7.50 below 107
Losses: between 114.50 and 117 lose up to 2.50 with max loss of 2.50 above 117
Rationale: I want near the money participation for a quick reversal from recent highs, but also want to sell a downside put to help offset some decay. I will stop this trade at 50% of the original premium risked. If I am wrong and don’t get the reversal I will not wait around for the spread to go worthless.