Anatomy of a Trade(s) – Option Overlays in $AAPL and $SBUX

by CC December 2, 2015 2:25 pm • Trade Ideas

One of our focuses at RiskReversal is trade management. And not just for trades ideas we do ourselves but also trades ideas that make sense against assumed long positions, as portfolio hedges, as yield enhancement and more. So we recently re-organized all the trade ideas we detail on the site into one page, here. Nothing has changed as far as trades we do ourselves. They are indicated on that page and on the original posts with an asterisk. We continue to update those with what we’re thinking and when we make adjustments or close, but we also wanted to be more consistent with the management of the other trade ideas (yield, hedges, stock replacement/alternatives) because those are equally important and their trade management is equally educational.

So here is a post updating two trade ideas that assumed long positions in two widely held (and beloved) stocks, Apple (AAPL) and Starbucks (SBUX) that we didn’t do ourselves because we don’t own AAPL or SBUX.

First, let’s look at SBUX. In late October we detailed several trade ideas into earnings, a stock alternative, a hedge and a yield enhancement. The Yield and Hedge were both December expiration and against an assumed long position in SBUX. Here were those trade ideas:

Bearish/hedge vs long stock:

SBUX ($62.50) Buy the Dec 60/50 put spread for 1.40

Rationale – Going out to Dec (rather than weeklies) probably gives you the most bang for your buck and this trade offers a wide range of profitability, paying 1.50 for the chance to make. This is also great for long time holders that want to protect profits.


Yield enhancement vs long stock:

vs. 100 shares of SBUX ($62.50) sell the Dec 67.50 call at .70

Rationale – Overwrites in SBUX are a bit difficult because the stock grinds higher and the options reflect that. You don’t get a ton of premium out of the money on the upside. This means you probably have to go out a few months to get something of value but safe enough away that you won’t be called away in the stock on one move. This call gives you just over 1% of yield in the stock.

The hedge isn’t working plain and simple. The stock is down nearly a dollar, and the hedge is as well. This is one of the risks with buying out of the money protection where the stock goes down slightly but not enough for the hedge to really kick in. Most of the premium paid has decayed. As far as management the stock looks like it will probably hold the 60 strike for now. It could test it on broader market weakness but it’s unlikely that a 60/50 put spread is that important of a hedge vs a long for just a few more weeks in December. If you were long the stock and had this hedge on it may make sense to close it on any weakness down towards 60 or even roll it at that point, out to February which will catch the next earnings.

The yield enhancement has worked quite well in SBUX. The Dec 67.5 calls are now worthless and can be closed for 1 or 2 cents and even rolled. For a roll I would look to January as it doesn’t catch earnings, but I’m not sure I’d do it just yet. The Jan 65 calls are .45 and that doesn’t seem worth it. But I think it makes sense to sell those or the 67.5 calls in January if the stock was to rally a bit into year end. That sort of roll could add a lot of yield over time.

Next I want to look at an AAPL yield enhancement (against assumed long stock) we detailed back on November 10th:

vs 100 shares of AAPL ($116.20) sell the Dec24th (weekly) 105/125 strangle at 2.15

This has worked well. AAPL has basically gone sideways since we wrote this and the strangle is now worth about .50. That can be closed right now for a nice added yield but you can probably be a little greedy with this. As long as AAPL isn’t threatening either strike in the next few weeks those will probably be able to be closed for less that .20 and rolled out to January as well.