Sunday, January 10, 2016

AAPL 2016 Update #61

AAPL stalled its decline just a little to close out the week. It closed out expiration Friday up just a little at +0.53 pts at 96.96

AAPL implied volatility (IV) is rising, now at 38%, as price further declines toward the 92 range. From chatter on stock boards, the pain is being felt by those still the long the stock and many are talking of never trading AAPL again. This is getting close to a bottom in sentiment.

More importantly, there is a significant upcoming catalyst for AAPL -- the Q1 earnings report (ER) due on Jan 26. This is the ER that includes the hotly contested holiday quarter. The current news is that unit volumes will be down, suppliers are getting downward revised orders and this is driving the stock lower.

What ACTUALLY will happen remains to be seen, but this could a point of capitulation for both bulls and bears if there is a violent move in either direction.

The nearest untested WEEKLY demand zone is below 85 a share, which is just 10 pts away from current price. See previous posts for a look at how I marked off larger time frame supply and demand zones.

With this information, how do I position myself in the stock?

Firstly, the decline in AAPL has been swift and relentless. AAPL is on the move. I have had on a conversion position (short call and long put which is called short synthetic stock) and been rolling that position down capturing full value as the stock declines. As a result, even though the stock is now trading just below 97, the position is still profitable by about +$3100.

Second, the risk in being long naked (unhedged) stock is further losses from a potential wash out over the ER. To mitigate that, I need to be long puts as close to current price as possible through the ER period -- at least until one day after Jan 26.

Third, the risk in having short calls after the ER will cap profits if the stock were to zoom upwards again. I do not think the stock would be able to rise uncontrollably, but having any short calls near current price caps this rise. I would be frustrating to have stock explode up from the 90 level only to be short calls at 90!

It is better to sell the calls AFTER a rise price to capture as much long stock delta as possible. That is significant.

So what I can do? 

I am currently long the 100 put expiring Jan 15'. With the stock up a little today, I can roll down and out in time the long put to the Jan 29' 95 put for a slight credit.  (I looked at the option chains the day before to see what prices were available)

This does two things: it lowers the floor of the stock price to 95. In the process, I am giving up 5 pts in profit but gaining an expiration cycle that is after the ER date. That risk is somewhat offset by the sale of the calls. It also creates long delta in the position. This morphs the trade back into a regular collar (long put, short call with separation in strikes) which has positive delta.

I am moving the long put out two weeks in time. This calendarizes the collar giving me opportunity to sell another call cycle to further offset the the cost of the put.

Why do I want to do this?


I could just keep rolling down the conversion hedge until the stock hits the 92 or 85 area and buying more stock from the sales.

The problem is what happens just around the ER date. It will be expensive to buy puts the as volatility will be high or rising until then. Buying this put will require either paying for it outright (expensive) or financing with the sale of a short call which will need to be relatively close to the strike price of the long put.

Having on a tight collar is great if the stock only continues to fall but that is a guess and and I do not know what will happen after the ER.

I will run into some trouble should the stock suddenly reverse upwards and "traps" the short calls during the ER.

What I don't want is a to have a conversion at the 90 strike and have the stock suddenly reverse and not be able to capture any gains. Ideally, I would like to have only stock + put going into the ER and the put strike as close as possible to price for maximum protection. The closer the put strike to stock price, all the better for the hedge.

To accomplish this, I have to give a little on the hedge. By moving the put lower and out two weeks in time I am buying up at the money (ATM) protection for a ER drop, but also opening up a vertical spread for a move upwards. By having time to sell a couple of short call cycles prior to ER, I am financing down the put purchase a little more.

Here are the trades and resulting position risk graph. This graph will be changing over the next couple of weeks as the short calls expire. It is now a 95-100 calendarized collar or diagonal spread - with the long put and short call at different expirations.

I am not expecting a any further strong upwards rebound in the stock at least until the ER. However, if that happens I am positioned to capture some upside and can easily roll out the calls in time. Though, I am still expecting a test around the 92 area and probably lower toward the 85 area.

The current maximum risk in the position for this trade is $1540 with breakevens at around 89. The position is showing a profit of +2700 with a maximum profit of around +4400 if the stock reaches 100 when the short call expires Jan 15'.

89/shr is over 40 pts lower from the where the position was entered and only then it is starting to show just a small loss! If AAPL does in fact get to this price it will have lost 31% of its value in less than a year. In unhedged terms, that loss is -$24,600! The collar is no where even close to that.

Trades:

-7c Jan 15' 100 Put @ 2.82
+7c Jan 29' 95 Put @ 2.67
Net credit: 0.15/c

Risk Graph and Position Greeks (courtesy of OptionsAnalysis)


P/L Graph


Greeks





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