Monday, December 07, 2015

AAPL Update #50

On expiration Friday, AAPL surged 4pts after a week long meandering sell off to close back at 119. The Dec 18' 115 call which I rolled into on Friday morning ended up going quite deep into the money by day's end. Volatility also dropped pulling out time value across the options.

The position is holding long 749 shares of AAPL, long the 7 contracts of the Dec 11' 110 Put, and short 7 contracts of the Dec 18' 115 call. With AAPL trading at 119 there are several things that can happen in the new few weeks:

1) Do nothing and if AAPL is above 115, the stock will get called away (700 shares, leaving 49 behind). To restart the collar, I would purchase the shares back and probably at a higher price.

2) Roll the short call up and out in time extending duration of the trade. I can do this now or wait a little longer to have all the time decay come out of the 115 call.

The short call is now quite deep in the money and time value is minimal (around 0.50). If the option goes too deep in the money (large delta), the opportunity to roll to a higher strike becomes harder.

I want to achieve a few things:
- Roll up another strike or more capturing +1pt or more in profit
- and pay as little as possible for the roll
- and still keep my short call expirations relatively short

I do not want to pay for example 0.80 for a roll that only captures at 1pt move. That leaves only 0.20pt profit. Remember, as a rule I will not pay more than 0.25 per 1pt move (25% of the strike width).

Looking at the option chain I see two possibilities:

Roll the short 115 call to either:
- Dec 31' 116 Call for about a 0.10-0.15 debit with a limit order
- Jan 8' 116 Call for a 0.25 credit

The Jan 8' 116 call is 32 days to expiration from today which is right around the 30d rule for time decay to exponentially grow.

Trades

I am going to roll out and up to the Jan 8' 116 call strike. This will give me a small credit to bank for a future put purchase, and time to further adjust AAPL price action. The 118-121 area seems to be of some supply and the stock may have a hard time moving through here.

+7c Dec 18' 115 Call @ 4.33
-7c Jan 8' 116 Call @ 4.57
Net credit: 0.24/c

The 110 long put is providing no protection (low delta, far OTM) and should expire worthless. I will not be buying this back as its not worth the spend of commissions.

The 116 short call option is still in the money but now has around a 62 delta. This is close to what an ideal full collar hedge would have on (35 delta put, 35 delta call). 

Let's do a position check at this point. If we do nothing from now until Jan 8' and AAPL closes above 116, the value will be as follows:

700 shares AAPL @ 116 = 81,200 (this gets sold by the short calls)
49 shares AAPL @ 116+ = 5 684+ (remaining share balance)
Cash balance of 7 X 24 = 168

Total value is: 86,884+

When the collar was started at the end of Feb 2015, the opening balance was 78,252 based on 600 shares at 130.16. The stock would be sold at 14pts below this level and still be around +8800 ahead.

And no funds were added to the account.

Hedging works!

Note: My OptionAnalysis application is showing a maximum profit of around $9400. The reason for the $600 difference is due to the TD trading commissions which are not accounted for in the application. Its small as a percentage of the balance, but getting rather significant over the life of this trade.



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