Update – Apple (AAPL) Earnings Hedge

by CC February 2, 2018 11:36 am • Trade Updates

Yesterday we previewed Apple’s Q1 earnings and detailed a potential hedge for those long the stock and a bit worried about a follow through on the recent pullback. Here was the hedge idea:

VS 100 SHARES OF AAPL ($167.25) BUY THE FEB16TH 180 CALL 165/155 PUT SPREAD COLLAR FOR $2
  • Sell 1 Feb16th 180 call at 1.10
    Buy 1 Feb16th 165 put for 4.20
    Sell 1 Feb16th 155 put at 1.10

The stock is down nearly 3% on the day and with it trading 163 this hedge is working pretty well. Let’s check in on it and talk about hedge management. Right now the hedge is worth about $3.20, up $1.20 from the initial cost. Intrinsically it is worth just $2 here, so the real significance of the hedge only kicks in if the stock continues lower from here.

Because this is a hedge with an opportunity to save up to $8 on a continued decline I think the best course of action is to stay with it. The short 180 calls are now worth just .20 and can be closed. Below here in the stock, $160 looks like the next support level and the hedge can be re-assessed there. If the stock were unable to hold there $155 very much looks in play which is the level this hedge targets:

If the stock were to find its footing and start to go higher it probably makes sense to re-assess the hedge once it is back to even money from the initial risk, at which point a roll to something targeting the next few months may make more sense than a hedge that expires in 2 weeks. But for now, this hedge is in good shape to really help if the stock continues lower.