Apple (AAPL) Earnings Trade Management

by CC July 27, 2016 2:08 pm • Education

Yesterday we detailed some AAPL trade structures into their earnings for those that were long the stock or wanted to be long. I wanted to check back in on those trades today with the stock higher to see how everything did and how one would manage each trade. The first was a simple hedge vs long stock:

Hedge against 100 shares of AAPL ($97):

Buy the July29th weekly 97 put for $2

This put is worthless with the stock up 6.50. so it cost money but that was sort of the idea of a best case scenario where the hedge was money well spent for those looking for AAPL stock to turn the corner and get above 100 finally, but worried about a move lower that would force a decision about what to do with the shares. As I wrote yesterday:

The risks to this hedge are that it becomes worthless. That’s fine if AAPL were to meaningfully move above 100 as the cost of holding onto the position with the hedge could easily be justified

So that can be left to expire and no new hedges seem necessary. For those that hedge earnings it can cost a good deal of money over the course of the year, but with this set-up it seemed to make sense and upside calls can always be sold over time to make up the lost premium of the hedge.

The next trade to check in on was the leverage trade. Personally I love these trades and even like the ones that can be put on for a credit even more (because they are net short vol into the event, see the Facebook one from earlier today) In this case the trade cost a little money but I thought that was worth it considering the likelihood of making money on this one. Here was the trade:

Buy the August 100/105 1×2 call spread for 80c

  • Buy 1 August 100 calls for 1.12
  • Sell 2 August 105 calls at .21 (.42 total)

With the stock 103 this is working perfectly. What cost 80c is now worth about 2.00. So it already added leverage to the move in the stock and it has potential for even more. With the stock at 103 this is worth $3 intrinsically. What that means is if nothing happened between now and August expiration and the stock was in the same spot this would gain another $1 in value. If the stock goes to 105 it can be worth $5. As far as trade management, if the stock went to 105 that may be a good spot to take it off for even more than it’s worth now, in order to keep your stock. And if the stock reverses back towards 100 or below I’d just keep a stop at around breakeven (100.80) At that point it could still be closed for a small profit. I really like those 1x2s versus long stock into events and I think retail investors should do them more.

The last trade detailed was a stock alternative, which was basically a super charged risk reversal where you could buy 2 upside calls while selling only 1 downside put. Here was the trade:

Buy the September 90/105 1×2 risk reversal for 15 cents

  • Sell 1 Sept 90 put at 1.05
  • Buy 2 Sept 105 calls for .60 (1.20 total)

This is also a favorite of mine and rarely do you get as good a set-up as AAPL had for this trade. You could basically buy 2 upside calls for the price of selling one downside put. With the stock 103, this trade is worth about 3.05. As far as trade management, there’s some great rolls that you can do on this trade. Selling that downside put takes up a significant amount of margin (based on being put the stock if it was below 90, so the best thing to do now is close the 90 put for .25, and roll that to an upside call sale. The 110 calls can be sold at .46. That can be done either as a 1 lot, creating a 2×1 call spread, or even selling 2, to make it a straight up vertical call spread and taking in .72. Either roll locks in the trade with no risk going forward. It can be worth up to the $5 width if the stock is 110 or higher in September in the case of the 2×2. And if kept as a 2×1 the profits above 110 are limitless. It can also be turned into a “call tree, where 1 Sept 110 call is sold, and then 1 Sept 115 call is sold for a total of .62. That way the second call can be worth up to $10 in the case of the stock going to 115 or above in September. It’d be hard to mess up this trade with a roll but it is still risking the close to $3 in profits, so for those that are happy with those profits on Today’s move it can always just be closed.