Friday, March 13, 2015

AAPL Collar - Update Stock Purchase

Mar 13

Analysis

AAPL has dropped about $8/shr since the Feb 26 conversion was established. The conversion can be traded to take advantage of this price movement. The short calls have lost value and the long puts have gained in value due to the movement of the stock price. The underlying stock has also lost value.

I had the assumption based on past price action and stock behaviour that there would be a decline in the share price after the January earnings report. I was also prepared to the let the stock get carried away.

Because this was a perfect -100 delta hedge, the net position value remains unchanged. This is unusual as a traditional collar has separation between the strikes creating a synthetic vertical spread (long put + long stock + short call).

Trades

1. Close the existing hedge

Buy 130 Apr 15' Call -1.55
Sell 130 Apr 15' Put +8.05
Net credit: 6.50 x 6c (6 contracts)

Brings in 3900.

By trading the conversion, I am converting the option value into cash. The value of the stock (now $8 lower) plus the cash value of the option keeps the position at its original value of around 78 000.

2. Purchase more shares

Immediately upon closing the hedges I am going to take some of the cash value and purchase more shares of AAPL. I purchased 25 and left a little in cash to help with any future adjustments. I could have easily used all the cash to purchase shares.

Buy 25 shares @ 123.07 costing 3076.

3. Re-hedge the position

I am holding the stock position for a long period of time and looking for appreciation. I am not concerned about temporary swings in stock price.

At this time I also do not want to pay much for the collar as this will burn cash and may not be recoverable should the collar not get adjusted or worse expires worthless right at the put strike. 

Instead, I will try to hedge the position for as close to 0 debit as possible and let the volatility of the stock create additional value in the options.

The new hedge is done for a net debit of 5/c. Additionally, I can only hedge only the 600 shares, leaving 25 unhedged. I have chosen to roll out in time 2 weeks and separate the strikes. Since I am expecting a return bullish move after this decline, I want the position to resemble a bull call spread.

Sell 130 May 1 15' Call @ +2.95
Buy 117 May 1 15' Put @ -3.00
Net Debit 0.05 x 6c = 0.30

Summary

Purchase 25 extra shares for (3076)
Purchase 117 Put - 130 Call for (30)
Some cash left in the account (800)

If the stock continues to fall again, the collar pieces have potential to appreciate and the stock will lose value. The maximum loss is -3600 at May 1 expiration, (123-117 Put) x 6 all due to the stock. Anything below 117 is covered by the put.

If the stock runs up as expected the collar will depreciate, but the position gains in value due to the stock. The max gain is +4200 (130 Call - 123) x 6 at May 1 expiration, plus the additional 25 shares (25 X 7)

Stock has no expiry, only the options.

Before May 1 we will observe the price action of AAPL:

- Stock moves back to previous highs and beyond, the position value will appreciate to a maximum of 4200. Should this happen, I will roll the collar up and out looking to keep the roll as close to a zero debit prior to expiration.

- Stock moves down I will close the hedges and attempt to purchase more stock again. The value of the collar will increase with any downward price movement. Ideally a fairly large move is needed so the collar can be cashed out with enough funds to buy more stock.

- Stock moves minimally between the strikes and the hedges expire worthless. I only have $30 invested in the hedges.


Value

+625 AAPL x 123.59 = 77243.75
+800 cash
+value of the 117 Put @ 3.00 X 6 = +1800
- value of the 130 Call @ 2.95 X 6 = -1770

Total value is around 78 073, down just under $200 from the opening position

This is after the stock has dropped $7/share and would have lost about $4200 if unhedged.

-End