Wednesday, December 16, 2015

AAPL Update #53

Today is FED decision day! What this means is that interest rates may start to climb, but the uncertainty of this decision still lags on the markets.

Interestingly, while the SPY was up yesterday AAPL continued to drop closing just above 110. AAPL continuing to show weakness. There have been some negative news reports about AAPL that is also dragging the stock. 

Here are some observations which is causing me to change my strategy slightly from earlier this week.
  • Demand is being tested again by today's drop
  • Demand is being weakened as this is testing deeper into the zone
  • If demand breaks, there is no FRESH demand until around the 80-90s area!
My goal is to contain risk. At this level I still have a profit in the position despite being 20pts below entry.

To contain risk, I need to now purchase a put but I don't want to sell any of the 763 shares that are in the account to pay for that. Doing so will require some capital. This is the plan to let the options and time pay for the hedge.

+7c Jan 8' 111 Call @ 3.40
-7c Jan 8' 109 Call @ 4.67
Net credit: 1.27

+7c Jan 8' 105 Put @ 1.22

The position is now hedged with 85 deltas, and the downside risk is fully capped at the 105 strike. (The reason the line is not completely flat is due to the 63 shares not hedged by the options). Profit is capped at 109. So the trade off is that if AAPL blasts off from this demand zone (unlikely given all the supply overhead), the profit will be maxed to 5500-6000.  Should the position fall below 105 (possible) and begin to test lows, the position will be down to around 2500 in profit, but there will be more opportunity to purchase stock.

Bear in mind that if the position hits the 105 mark, that will be 25pts below the entry price which would be a very large real loss in an unhedged position. I will still be profitable though even at this level.

In hindsight, I should have probably hedged with the put a day or two ago. But this shows that an adjustment is still possible and the position can maintain profitability. 

AAPL P/L Chart to Jan 8'

Where AAPL goes from here is anybody's guess. I know is that this demand zone is being tested hard and it was never fresh to start. That means that a further breakdown is possible. There is also lots of overhead supply levels.

At this point, traditional technical analysis is going to be useless as it lagging and the price is starting to whipsaw. Fundamental analysis is going to be contradictory, at least until the earnings report.

The P/L curve is what is real at this point with the maximum and minimum levels are defined. In trading, this is the best we can do.

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