Update: Apple (AAPL) May Call Fly – Omaha Stakes

by CC May 9, 2017 1:07 pm • Trade Updates

A week ago we previewed Apple (AAPL)’s earning and offered a couple of trade ideas for those that were long, and those looking to own the stock but with defined risk. The stock saw a little selling immediately following the report but quickly stabilized and then surged to new highs, partly on the news that Warren Buffett had increased his stake in the company. The trade idea I wanted to focus on today is the bullish defined risk idea as the stock is now near its target price. Here was the idea, from May 2nd:

Stock Alternative in lieu of 100 shares of AAPL (147.50)

Buy the May 145/155/165 Call Fly for 3.00
  • Buy 1 May 145 call for 4.30
  • Sell 2 May 155 calls at .70 (1.40 total)
  • Buy 1 May 165 call for .10

With the stock now 154.25, this trade is worth about 6, or a double from entry. That’s a nice little profit. More can be made of course, but we’re now risking more as well. So how do we manage this trade?

Let’s analyze the changing risk reward. Starting with how it was on entry. The stock was 147.50. The breakeven on the call fly was 148 (145+3). That higher breakeven of .50 is the main cost of defining risk (the other is the reward is defined as well, with a max profit of $7). In other words, you can buy the stock where it’s trading, and have 50% odds of success, but unlimited risk/reward. Or in this case, you could buy a stock alternative, with a slightly higher (by .50) breakeven, and about a 48% chance of making money (due to the slightly higher breakeven)… but with defined risk/reward. Again, the key here, is the MOST that could be lost was $3. Much less than the implied move into the earnings event. Yet what could be made on the upside is $7. In other words, pretty good risk/reward.

But now, with the stock higher by more than $10, that risk/reward profile has changed. Now, there is $6 at risk, instead of the original $3. The additional reward now possible is down to $4, from the original $7. So on a very basic level, the risk/reward has gotten worse, as we’re now risking more than we can make. But there are additional factors to consider…

First, we no longer have the market moving catalyst we did on entry (earnings). In fact, between now and May 19th expiration, the options market is only implying a move of about $3 in either direction. And that’s good in this case, because we don’t want the stock to move. The longer it stays around the 155 strike, the more profits we have. With the mark to market value of our trade now $6, that puts our new breakeven (of making or losing money from our current mark to market) at $151 (and $159 on the upside).

What we do next as far as trade management depends on our intentions.

1: 155 target – If this was simply a bullish trade targeting the 155 level, be patient, using 151 and 159 as stops. If the stock closes between those 2 points next Friday, the current trade will have more profits. With up to $4 more in profits possible if the stock closes at 155.

2: Still Bullish – For those wanting to extend the bullish stance, this trade is sort of running out of room as its max profit targets the 155 level. Rolling out and up in June would book some profits and keep the bullish stance on. But even with this I think you wait until the last possible moment in May expiration as more can be made from the original trade. Perhaps use 155 as a “stop” in that as soon as the stock gets there, then roll, but be patient beforehand.

3: Take Profits Now – Selling part or all of the original trade. Selling half allows the rest to remain for additional profits, but at no risk of losing money overall.