Anatomy of a Trade – $AAPL Picking

by CC November 2, 2015 3:33 pm • Commentary

Prior to Apple’s (AAPL) fiscal Q4 earnings released last Tuesday, we detailed several options trades (here) for those considering to add overlays to an existing position, or to express a directional view. With the stock 4% higher since earnings, we want to now review each trade and offer some commentary on trade management:

The first was a simple yield enhancing overwrite:

Yield Enhancement Against Long Stock – Overwrite:

AAPL ($116) – Against 100 shares, Sell 1 Nov 125 call at $1.20

Rationale: this adds around 1% of yield but of course you are at risk of giving up your stock on a gap higher and must be willing to do that.

Despite the stock being nearly $5 higher at 120.75 these calls have been cut almost in half, now worth 0.66. This is exactly how you want overwrites to work. It’s added about a half percent in yield to go with the 4+% gains in the stock. As far as management it’s just a matter of how long you want to stick around with the short call. If the stock continues to creep higher it’s really not much risk of losses on the overwrite. Of course any gap higher above 125 in the next few weeks and the overwrite risks capping gains in the stock. The majority of the trade that came in after the post earnings vol crush has happened. So now it’s a stock call on whether you want to wait around for the potential of 0.66 more in added yield.


The next trade to go over was one for those that were worried about the event but wanted to hold onto their stock. It was a protective collar:

2) Protection Against Long Stock – Collar:

AAPL ($116) Against 100 shares, Sell 1 Nov 125 call at $1.20, Buy 1 Nov 104 Put for $1.20

Rationale: this collar is for those willing to give up some upside potential in order to have disaster protection just above huge technical support at $100 over the next month.

The protection wasn’t needed but this was still a gret trade for those looking to hang on to their stock. With the stock at 120.75 this collar is about a 0.55 loser vs gains of nearly $5 in the stock. Not a bad price to pay for that peace of mind. This can be closed at any time as the 104 put no longer serves as realistic protection.


The next one to detail was a stock alternative that expired on Friday. This defined risk in the stock to 2.80 and targeted 126 on the upside:

Long Stock Alternative – Defined Risk

AAPL ($116) In place of 100 shares, Buy 1 Oct 30th weekly 116/126/135 Call Butterfly for 2.80

Break-Even on Oct 30th weekly expiration:

Rationale: This trade structure is in the money and risks 2.4% to possibly make up to 6% over the next 3 trading days with a wide range of potential profitability to the upside. This trade also attempts to offset the expected vol crush after earnings.

The stock closed at 119.50 on Friday and you would have been assigned the stock once again coming into this morning. Since the trade cost 2.80 it was worse than owning stock and you would have missed out on that portion of the 5 dollar move with an effective price of 118.80 in the stock vs 116. But again, that’s all it could have lost if AAPL would have cratered so it was essentially a small amount to pay above where the stock was trading going into earnings to have a defined risk long.


The next trade was one where you could replace an existing long with options. The intention was define a range where you’d be willing to buy the stock back ($105) while participating in upside if the stock gapped higher:

Stock Alt/Replacement – Bullish Risk Reversal (with downside risk)

AAPL ($116) In place of 100 shares, Buy Nov 105 / 124 Risk Reversal for even money

Rationale: This trade looks past the potential for short term movement post earnings and considers a run into the holiday selling season. Rather than spending a lot of premium, this trade creates a wide band where the trader could be put the stock on the downside, above key technical support at $100 as identified below in my preview and just above the breakdown level from early August. This is for those looking to catch a breakout in AAPL where they would participate like stock but are unsure about exact entry here into the earnings event. If the stock does pullback in the near term this trade acts better than simply being long stock on the downside. If the stock continues to trade in a range this trade is no harm no foul.

This trade is currently worth about .90 vs the nearly 5 dollar gains in the stock. So not a great replacement for the shares at the moment. As far as management, this is one where you could try to tighten up the strikes for even and try to get closer to the upside call, or simply close the trade for a small profit and look to re-enter the stock on any pullback.

The final trade was a straight bearish one:

Bearish – Dollar Cheap weekly puts

 AAPL ($116) Buy the Oct 30th weekly 115 / 105 put spread for 2.60

Rationale: options prices are not exactly cheap heading into the print, but for those who are considering directional plays it makes sense to spread long options.

This one is pretty self explanatory and expired worthless with the stock higher on earnings.