Sunday, April 07, 2013

Options Trade (AAPL Butterfly 420-430-440)

UPDATE - ARP 12th

AAPL closed right near the 30 strike on Apr 12th expiration.  While this is a home run for the trade, we took the trade off a day early as the stock over shot. Rather than risk loosing all the profit with the trade carrying so much gamma, the position was sold for 3.84.  Not nearly the maximum, but a nice return nonetheless of 1.48 for just under a week.

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The markets declined sharply during the week of Mar 31 to Apr 6, but a few stocks have been resilient and while near their lows, they have not moved much lower.

AAPL is one such stock. Countless people must trade around the gyrations of AAPL.  Recently however, it does appear the stock has bottomed at least for now.

Earnings are coming up in a few weeks and it would appear from the declines that all news has been priced in.

On Friday Apr 6th, during the huge decline in the NQ futures, AAPL held up remarkably well staying in the low 420-425 range.  The price action is suggesting that it may rebound as it already had a opportunity to move past the recent 419 low.  Notice that there is a demand zone around this level.

A potential trade to capture some elevated volatility and a potential slight move upwards is the weekly Apr 2013 AAPL 420-430-440 call fly.

This trade gives a wide range to capture price and with AAPL trading on the lower side of the butterfly it is a low risk way to play this name over the next week with high profitability.

The butterfly is a range trade using option strikes.  Its maximum payoff is at the 430 strike at expiration. It benefits from both time decay (theta) and a decline in volatility (vega).  Because we are so close to expiration we want the stock to just move up slightly and capture all the time premium.  The options for this trade expire by the end of this week (Apr 12th).

Without getting into the all details around greeks, this trade's risk is limited to the amount paid for the butterfly ($2.25) and its maximum potential reward is just about $730, just over 3:1.

The chart and the risk diagram is shown below.





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