Big Printin’ – AAPL, JPM

by Dan February 10, 2016 3:59 pm • Commentary

Here were a couple bullish directional trades stocks that have been beaten up of late where traders are getting a little creative to express their views with ratio spreads and risk reversals.

1) AAPL – shortly after the open when the stock was $95.67 a trader bought to open the May 100 / 110 1×2 call spread, 10,500 by 21,000x, paying $1.36 to open.

The trader bought 10,500 of the May 100 calls for 4.40 and sold 21,000 of the May 110 calls at 1.52 each, or 3.04 total, netting a debit of $1.36, or $1.43 million in premium.

This could be a leverage trade against a long stock position of 1.05 million shares. If this is the case, it looks like a leveraged over-write, selling one of the 110 calls against the long stock position, and then adding a 100/110 call spread.

Here is how this trade makes money on May expiration.

The ratio call spread breaks-even at $101.36, with profits of up to $8.64 up to $110.  If against long stock, if the stock was $110 or higher the long stock position would be called away, but this would essentially be at $118.64 the gains of the stock, plus the value of the call spread.  Thus adding 9% yield to an existing position.

There are two scenarios where this strategy hurts, either below $100, then the trader would lose the $1.36, or if the stock is meaningfully above $118.36, then the extra 110 call that is sold costs in lost profit potential. So there is a risk reward here as to how much you are willing to pay for potential yield/leverage vs how much potential profit on an extreme move to the upside.

Lastly, if this was not against stock, then this trade is a loser below $100, loses up to $1.36 between $100 and $101.36, with max profit of $8.36 at $110, and then the profits trail off in a linear fashion, with losses again above $118.36.


2. JPM – the stock had a fairly anemic bounce with European banks today. As I write the stock is down 1%, very near the 2016 lows just near $55 where the stock has bounced 3x in the last month, but interestingly unable to break above $60:

JPM 6 month chart from Bloomberg
JPM 6 month chart from Bloomberg

Shortly after the open when the stock was $56.45 a trader made a bullish bet in the form of a call spread risk reversal, selling to open 3400 March 11th weekly 54 puts at 1.38, or $469,200 and bought to open the March 11th weekly 59.50 / 63.50 call spread 5100x for .92, or $469,200 in premium.  So this trade cost the trader nothing aside from commission. The trade breaks-even at $59.50, with gains of up to $4 between $59.50 and $63.50, with max gain of $2.04 million above $63.50.  The worst case scenario is that the stock is at $54 or below and the trader would be put 340,000 shares and lose one for one below like stock below that.