A few weeks ago we looked at a possible yield enhancement strategy for those that were long Apple stock. The idea behind the trade was to sell a strangle in the stock, acting as a bit of a buffer to the downside if AAPL were to move lower over the next few months, and act as a buy-write against gains in the stock if the stock moved higher. Well, the stock has moved higher, quickly, following early rumors of iPhone 7 demand and the stock is at the short call strike. So I wanted to go over what to do in that situation. First let’s recap the original overlay:
Apple (AAPL) – Yield enhancement for current holders of the stock:
vs 100 existing shares of AAPL ($106.75)
Sell the Dec 115 / 95 strangle at $3.25
- Sell 1 Dec 115 call at 1.80 call
- Sell 1 Dec 95 put at 1.45 put
With the stock now 115, the strangle’s upper strike is in play. So how do you manage this overlay if you’re long stock? The one thing is this is a good problem to have. The stock is more than 8 dollars higher than where it was when detailed. The strangle is at a loss but remember at December expiration it is effectively selling the stock at 118.25. So that’s the key spot to keep an eye on.
Apple’s move from about 103 to 115 in just a few days has been surprising and it’s more likely after a move like that the the stock takes a breather or consolidates a bit. And for those that want to keep the overall bullish position intact and make sure the 115 short call gets rolled up, waiting for that pullback is probably the best move, while keeping that 118.25 break-even in mind. Right now, the Dec 155 call is about 5.30. The Dec 95 put is about .75. To re-establish that original strangle, you would either roll up to the 105/125 or a bit more aggressive at the 100/120 strikes. The best timing to do that is on a pullback from here (112.30 was prior resistance and could become support).
The entire overlay versus stock is still long about 60 deltas here. So the stock going higher from here is still profitable. And moves lower lessen profits. But a move lower is also positive in that it allows for better prices on rolling the strangle higher. And if a strangle is rolled successfully and the stock expires in Dec between the strikes, that yield can make up for the losses of the original strangle against the gains in the stock up to this point. Now it’s just a matter of timing of when to do it at the best prices, or if its necessary to do it at all. that depends on what’s next in the stock, and I’ll update this post after any significant moves from here, higher or lower.