Tuesday, December 22, 2015

AAPL Update #54 (Purchase Stock)

AAPL just kept declining this week. The short 109 calls are OTM as AAPL closed Monday at 106. The week's so far low is 105.57.

The long 105 puts at one point jumped up by 1.25.

The position is still profitable, but the dynamics of the hedge have changed. Here is what has happened.

1. The short calls have been losing delta. Each call has gone from a -60 delta to about -35 delta. This has buffered the loss in the stock. The short calls, however, are losing their effectiveness as a hedge.

2. The long puts, unlike other expiration cycles are gaining in value. They are at +45 delta and climbing. The puts create a floor for the stock price. The puts are 1pt away from going ITM.

3. Theta or time decay is now acting against my position. If the stock were to continue dropping past the 105 area, all of the value in the position will be in the put as the short call will continually lose deltas and approach a 0 value.

In fact here is what the P/L and risk diagram look like:

Fig 1. AAPL P/L and Risk Curve

The strategy at this point is to A) adjust the position to collect profit and B) purchase more stock.

The options I have at this point are the following:

1. Roll down the short calls and collect more premium. This is released as a credit.
2. Roll the down put and collect some of the value.
3. Roll down both the call and put and collect the combined premium

Doing anyone of these will alter the risk curve. Bringing the call in closer to the money will create more theta in addition to bringing more credit. Rolling down the put will move the floor of the position down increasing the risk.

At this point, the stock may have fallen and be ready to stop. However, I know from my chart that we are far from a demand zone yet (85 area is untested demand) and many, many untested supply zones exist overhead. I do not expect much of a rebound in the stock just yet. In fact, I expect further moves to the downside.

What I will be doing is squeezing the collar, capturing more premium and tightening up the effectiveness of the hedge.


Part 1 - Adjust calls
+7c Jan 8' 109 Calls @ 1.29
-7c Jan 8' 107 Calls @ 2.24
Net credit: 0.95/c

Part 2 - Purchase stock
+6shrs AAPL @ 107.38

I will hold on the puts just yet, just in case we see a large wash out move to the downside.

Total portfolio shares are 769, with a short call at 107 and a long put at 105. The collar is tight at this point with a delta of 85. 

This means that for every 1pt the stock drops, 85% of that loss is covered. Conversely, if the stock rises by 1pt, only 15% of that rise is captured.

The new P/L diagram at this point is:
Fig 2. Adjusted AAPL Collar Graph

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