Anatomy of a Trade – $AAPL July Strangle Sale vs Long Stock

by CC June 24, 2015 1:26 pm • Education

A few weeks ago we detailed a yield enhancement strategy for those long Apple (AAPL) stock as we saw the chances of large movement in either direction during the July expiration cycle to be minimal. Here was the trade and the rationale at the time:

But for those of you who are long and strong and you would have to pry the stock out of your cold dead hands, and are waiting for a pullback to buy more, then consider selling options vs your long stock to add potential yield to your holding, a buffer to the downside, and possibly a limit order to buy more stock at a discount:

Against 100 shares of AAPL at $129, Sell 1 of the July 125/135 strangle at 3.50

– Sell 1 July 125 put at 2.00

– Sell 1 July 135 call at 1.50

Break-even on July expiration:

– Adds yield/protection to a long stock position of up to 3.50 between 121.50 and 138.50 with full collection of 3.50 between 125 and 135.

-Upside: Stocked called away above 135 at an effective sale price of 138.50 (up about 7%) and

-Downside: put 100 shares of stock at 125 or below, at an effective price of 121.50 (down about 6%). Losses of the stock and the short puts below 121.50.

Rationale:  We chose July expiration as it will not catch earnings which will be the next identifiable catalyst.

Since then the stock has essentially flatlined as it continues to consolidate around the 130 level and is in the exact spot we first suggested the trade.

Screen Shot 2015-06-24 at 10.57.31 AM
3 month AAPL from LiveVol Pro

But implied vol (which was quite low 2 weeks) is starting to pick up just a touch (red below) even as the realized vol of the stock (blue below) continues to decline as the stock goes sideways :

Screen Shot 2015-06-24 at 11.09.06 AM
3 month IV30 vs HV30 from LiveVol Pro

So with the stock back at 129 this strangle is now offered at at 1.20 and still three weeks left until July expiration we like the idea of closing this for that price and locking in the $2.30 in yield (or about 1.8% in less than 3 weeks). This strategy is a great way to collect some premium against your stock and we would only do it at these vol levels in a time period with little event risk. But at some point it doesn’t make a lot of sense to wait around for the last part of the premium to decay.