Heading into the $AAPL earnings we detailed two trades ideas to define risk and one to play for a move lower. I wanted to look at how those trades stand with the stock lower and discuss proper management. First, let’s look at the collar we detailed that could be used as protection against existing long shares. Here was the trade idea from Friday:
vs 100 shares of AAPL at $100 Buy to open the March 110 / 90 collar for close to even money*
- Sell to open 1 March 110 call at $1.35
- Buy to open 1 March 90 put for $1.65
With AAPL 93.75 the March collar is worth about 2.40. So it’s saved $2+ on the move lower. That’s good but not great, but this was really disaster protection and if the stock falls below $90 is where this really helps. Essentially you are stopped out on much a move lower in the stock between now and March expiration. What to do next depends on what you want to do in the stock. If it’s simply a hedge against a stock position you have no ambitions to trade around you can simply do nothing and keep it as protection against a a breakdown, knowing that you can’t lose money below 90. If you do want to start to add deltas and lock in some profits there’s two ways to go about that. The first is you could look to spread the 90 puts with a sale of a lower strike. The March 80 puts are currently about .65, but I’d wait to see what happens in the stock next before selling those, they could become pumped on a break of $90. When those are sold you’ve changed your risk profile as you’re no longer protected below 80 in the stock but that’s a pretty significant move from here and a sale of those would essentially lock in some profits on the collar while still having $10 of protection below. The other thing that can be done for those looking to add to their stock position is to buy some AAPL shares below 90. At that point your essentially getting to replace your existing stock lower (because the 90 puts hedge the previous stock) and if the stock then bounces higher you can sell those shares or sell upside calls against. A lot of options on this one, most of them good for those looking to buy lower.
The second trade to look at was the stock alternative/replacement. Here was that trade idea:
Stock Alternative/ Replacement:
In lieu of 100 shares of AAPL ($100) Buy the Feb 100/110/120 call fly for $2.50
- Buy to open 1 Feb 100 call for 4.05
- Sell to open 2 Feb 110 calls at .85 each (1.70 total)
- Buy to open 1 Feb 120 call for .15
With the stock 93.75 this trade is only worth about .65. But that’s a lot better than being down more than 6 in the stock, and that was the intention. If you replaced stock with this trade the best thing to do would be to close it for a loss and look for your entry back in the stock. If you bought it as an alternative to stock you were thinking of buying you too did better than if you had bought the stock. It should also be closed and you should look for your spot to perhaps do a similar trade in March with the strikes 7 to 10 lower.
The final trade idea was a straight bearish one:
Outright Bearish:
In lieu of 100 shares short of AAPL ($100) Buy Jan weekly 100/93/86 Put Butterfly for $1.85
With the stock 93.75 this is worth about 4.80, so more than a double. It can be worth up to $7 if the stock closes at 93 on Friday. So a bunch of short premium yet to come in on the 93 line (of which it has 2x short puts). There’s very little risk on this trade above unless there’s a complete turnaround in the next 2 days (it’s possible) and the same risk exists below. The breakevens on this trade vs the 4.80 it’s currently worth are 96.20 on the upside and 90.80 on the downside. I’d use those levels as mental stops, any close between those spots on Friday and this is worth more than it is now. Any moves above or below those levels and profits are at risk.