Sunday, December 13, 2015

AAPL Update #52 (Purchase Stock)

This is going to be a long entry, but hopefully very educational! Please bear with me.

AAPL dropped on Friday and closed at 113.18. This was the second day of price declining and no doubt this move has been significant. In four days the stock has come down just over 4 points.

The 110 puts on the position expired on Friday so the position is now technically not a collar any more. The 116 short calls have gained value (as they will when the stock price drops) offsetting the drop in the stock.

Now is a good time to look at where we are on the chart and explore adjustments for the coming week.
AAPL Chart

Here is where we are on the chart. I have stepped the chart back to a 2D interval (daily but each bar represents 2 days of trading) to remove some of the noise and help focus what I see.


AAPL 2D Chart
Chart 1 - AAPL in 2D (2-day) timeframe from TradingView

  • Fresh untested supply (selling) is clearly at the 117.66-119.85 area. This is where price should turn into a rally.
  • A tested demand area in a range from 108.24 - 112.71. There is a previous price pivot test in this area.
  • Higher up there is another supply level in the 120.96-123 area.
  • Fresh demand is lower and not shown on this chart. 
The two yellow levels are the areas that I am now focused on. Here are expectations based on what I see:
  1. If price rallies, there is more selling at the 117 level. Price will not break this range easily.
  2. If price falls more, it is entering a once tested demand zone. I would expect price to test this area at least as far as the first wick.

Put Strike Calculation and Expected Move

The put strike formula (which is 1/2 the expected move) has the optimal strike at 107-108 over the next 28d based on current implied volatility (now at 29%)

This is an indication of the area where I need to hedge for the put to have a statistical chance of making a profit at expiration.

Current Hedge

The put has expired and did not contribute to the hedge. It was too far OTM.
The original ITM short 116 call has decreased in value (this is a good thing), but it also means the hedging delta is decreasing. Originally the short call was around -60delta but it now down to about -38delta. On average this hedge has captured about 2pts of this 4pt move downward.

As of Friday, this is what the P/L position looks like. Lots of theta decay, but well off the maximum possible profit.

Chart 2 - P/L Graph from OptionAnalysis


Next Steps

The short call is not providing enough protection at this point. I am going to make an adjustment to bring short call back to at least 50-55 delta.

This means rolling down from 116 to at least the 113 strike. Doing so will release add an additional credit of around 1.40/c. This will be added to a small additional credit from a previous roll this week. I am rolling down an OTM call to ATM and in total have about a net 1.65-1.70/c credit.

With this credit, I have three possibilities:
  • Purchase stock
  • Purchase stock + put
  • Purchase put
By putting all of the funds into stock, I will maintain a covered call position with no defined on the downside.

By purchasing puts and stock, I will need to balance the put strike purchase and stock. The put will take away a certain amount of stock that I can buy.

Just purchase a put and no stock. This would let me buy a closer in strike put, providing more protection if the stock were to fall more significantly. But this also does not leave funds to purchase more stock to add to the account.

Trades

I believe in always taking some of the captured premium and always purchasing more stock. This is the strength of hedging, and how the position appreciates when price reverses.

The demand zone that price is more than likely going to test is quite wide and I believe has significant strength. This is a larger than a daily timeframe and for the most part larger timeframe zones have more "strength".

However, it is possible that the market continues to weaken and price breaks these zones until a newer fresh demand area forms.

[Update]

At the open, price further declined creating an amateur gap down into the demand zone.

By the end of the day a bullish pivot formed. The trade to roll the call deeper in the money to capture more premium. If the stock is going to rebound I will need to look at rolling the calls up and out in time to capture more value.

This was actually expected that there would be a slightly positive reaction to the demand zone here.

Part 1 - Roll down the call
+7c Jan 8' 116 Call @ 1.59
-7c Jan 8' 111 Call @ 3.70
Net credit: 2.11/c

Total net credit available is 2.35/c

Part 2 - Purchase put protection
The 104 Put is 1 standard deviation from current price and current price is in a larger timeframe demand zone. Statistically, the Nov-Dec timeframe tends to also be bullish. The short call is providing 55 delta of hedge.

Change in strategy to for this cycle only. I will be aggressive and maintain the short call deltas on further moves down. Since this is a demand zone, I am going to forgo the PUT realizing that this opens up more downside risk, but also higher profit potential.

Part 3 - Purchase stock
+14shrs AAPL @ 112

Total shares of stock in the position is 763.








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