Yesterday, we previewed Apple’s (AAPL) Q4 earnings and detailed two trade ideas, one a stock alternative / defined risk bullish, and the other a hedge for those already long the stock. The stock is up about 3% on the report so let’s check back in with those ideas. First, the bullish trade:
Defined Risk Bullish
AAPL ($166.50) Buy the Nov17th 167.5/ 177.5 call spread for $2.50
- Buy 1 Nov 167.50 call for $3.50
- Sell 1 Nov 177.50 call at $1
With the stock 173 this trade is worth worth about 4.70, nearly a double from the entry price. Intrinsically it is worth a little more (5.50). What that means is if AAPL closed on Nov 17th exactly where it is now almost this trade would be worth almost a dollar more. Of course it is now mostly dependent on stock movement as it is well in the money. So it’s really a decision on the stock itself holding or extending these gains that is the biggest variable. Taking profits and looking for an entry on a pull back could be the move. But one roll that could make sense for those looking for higher highs, but giving yourself more time is to roll out to the Dec15th 170/180/190 call fly. Right now that’s about 2.60, meaning it re-establishes the bullish positioning up and out a bit while taking most of the risk off the table. (with the profits booked from the first trade the new position is risking .40 to make up to 9.60 in profits). It is not “booking” any of the current profits overall, but extending the view with almost no risk.
Now to the hedge:
Hedge for Longs
vs 100 shares of AAPL ($166.50) Buy the Dec 155/180 collar for .20
- Sell 1 Dec 180 call at 1.80
- Buy 1 Dec 155 put for 2.00
With the stock 173 this would cost about 1.30 to close, for about a 1.50 loss versus the gains in the stock. But nothing really needs to be done on this quite yet because any close below 180 on Dec expiration means this collar would only cost .20 versus gains in the stock. If the stock continued higher towards 180 it may make sense to close and roll, but probably no reason to panic on this in the near term.
The next stock I want to check in on is General Motors, after they reported U.S. Sales. In early October we took a look at the stock following a faily parabolic move higher. Our sense was that a pullback for the shares over the next month or so was very possible. Here was the trade idea, when the stock was 44.80, on October 6th:
Trade Idea: GM ($44.80) Buy Nov 44 / 40 put spread for 80 cents
- Buy to open 1 Nov 44 put for 95 cents
- Sell to open 1 Nov 40 put at 15 cents
With the stock now lower at 42.47 this trade idea is worth about 1.60, a double. As far as trade management at this point this is a little different than the AAPL call spread above in that the trade is actually worth a tiny bit more than the current intrinsic value, and if the stock closed here on Nov17th it would actually lose some value. But it’s basically a defined risk short for the next 2 weeks. Those cool with the current profits can simply close and move on. Those looking to extend the view should probably look out to December. One way to do that while booking some profits is to close the Nov 44 puts at a profit, and roll to the Dec 40’s for .55, creating a calendar. Once the Nov 40’s expire on the 17th, the Dec 40’s can be further spread. This roll books about half the current profits and allows for more into Dec expiration.