Friday, August 21, 2015

AAPL Update #24

Aug 21

Analysis

Expiration Friday! The market is having a rough couple of days - the DOW is almost 600pts in two days. This is not working out too well for my long AAPL position as the stock is losing value and the hedges were too far out to provide any protection. AAPL is trading about 108.60 this morning which is above the long put strike of 105 - no value left in this hedge). This is drop is larger than I expected and has broken the most recent low of 109.63

With AAPL off quite a bit in the last two days and expiration today, I am needing to make a few adjustments to the position. Firstly, the short Sep 4' 117 call has come in quite a bit and is trading for around 0.75 to 0.80.  This is down substantially from its original sold value of over 2.50.

The break even for the position is around 113.25, so with today's move even with the extra shares, the position is now below its break even value. The stock has dropped over 8pts in two days, which is about one to two months movement in just two days!. On top of that the VIX is trading at 23 so volatility is spiking at an all time recent high.

Here is my plan for the adjustment. Remember, in this account I cannot place put spreads only short calls and long puts, so that forces the puts to go out a bit wider due to the high cost (volatility).

I am going to close the Sep 4' position by buying back the short calls. The value has dropped a lot in them and with the cash reserve in the account from the dividend I can afford to purchase them back. I am then going to re-hedge the position at a shorter expiration - Aug 28' cycle. This minimizes the amount of theta I have to pay and reduces the effect of vega on the position. In 7 days the hedges will expire.

I am going to place the hedges for as close to even money as I can, although because of the drop the skew is such that the puts are costing more. This affects the choice of strike placement. I also want to give the stock a bit of room, should a rebound occur in the next week and the stock gets back to around the 113-115 area.

However, if the stock continues to drop quickly, I want to try and capture a few more shares. Right now the market is dropping quickly and round numbers (100) could be a possibility!

The market is dropping very quickly which makes placing new hedges difficult in the midst of this move. As I don't know if the bottom is in, or the stock will keep dropping, until a more definite trend develops, its best to keep the expiration as short as possible and try to capture any outside moves.  Normally I like to place both hedges at around 0.35 delta, but with today's increasing volatility I have had to widen them to around 0.20 delta in order to get them for around an even credit.

In hindsight, when the stock briefly traded in the 116-117 area, just three days ago, I should have rolled the Aug 21' 105 puts up and out to Sep 4'. With the severe drop in the last two days and volatility expansion, that hedge would have most likely paid off. But that is trading.

Since trading at around 132 earlier about a month ago, the stock has fallen nearly straight around 25pts! To put things in perspective, in all, the position is realistically down to about 75 056, or 3200 if today's price drop holds. This is from position starting value of 78 252 back on Feb 26. If the stock was not actively hedged the loss would be be nearly 15 000!

I will also note that AAPL has from the past forms a bottom or low during the Aug-Sep timeframe. On the technical side of things, the RSI is diverging upwards from the price action, so I suspect we getting very close if not already at the washout phase.


Trades

Part 1 - Close all the hedges 

+6c Sep 4' 117 Call @ 0.74
-6c Aug 21' 105 Put @ 0.06

Part 2 - New hedges with shorter (1 week) expiration

-6c Aug 28' 113 Call @ 0.87
+6c Aug 28' 102 Put @ 0.93

Net Debit 0.06/c

Stock is trading at around 108.50.

Entry debit for position 78 510 and P/L is -3175. Breakeven is roughly at 113.

-End

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