Sunday, May 10, 2015

AAPL Collar Update #2

Apr 20

Analysis

Earnings is next week. I have elected to spend some cash to tighten the collar in case the earnings cause a sudden decline in price. The collar going into earnings next week becomes a synthetic 126 - 130 spread with the stock trading today at 129.32. This four dollar spread has a net cost of 1.63 + 0.05 = 1.68. The roll is expensive due to the high implied volatility rank (IVR) before earnings.

The collar is currently inside the expected move (EM) for the earnings cycle. The move range is expected to be around 125 - 137

If the collar expires above the short 130 strike the collar will go out with maximum profit of the original 117-130 collar (+4200), less the cost of the roll of 978. Because we are so close to expiration and volatility is high, the cost to roll the collar up and out in time to extend enough may not be worth it. I don't want to roll the collar 5 dollars out with a cost of nearly 5 dollars.

Instead I will choose to let the collar carry away all the stock at 130, take my original profit of 4200 (less 978 cost of the put roll) and look to purchase the stock again.

If the collar appreciates, meaning the stock drops, there may be an opportunity to roll the collar down taking some profit and purchase more stock. Because we are so close to the expiration, the gamma and theta effect on the option value are high.

Trades

1. May 1 expiration cycle, rolled 117 Put to the 126 Put

Sold 117 Put for -0.43
Buy 126 Put +2.06

Cost to roll is 2.06-0.43 = 1.63 for a 9 strike movement (.18 / strike) with about a week and half to expiration and inside the earnings cycle.

Net Cost 1.63 * 6 contracts = 978

Value

Approximate values, assuming stock is carried away at 130 by May 1 expiration.

600 shares X 130 = 78 000 (assigned by the calls)
25 shares X 130+ = 3 250 (remaining in account)
Position value will be at least: 81 250

(Remember the opening position value with the stock around the same price on Feb 26 was 78 252)

-End

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