Saturday, January 23, 2016

AAPL 2016 Update #66

On Friday, the markets rallied strongly right into the end of the day. Volatility is beginning to contract and AAPL gapped up in the opposite direction of the current trend (a professional gap). What is making me reconsider changing this hedge is the magnitude of the move up, +5.42% (from 96.30 to 101.42). This is telling me that insitutional or other large money buyers are stepping in ahead. This is not retail.

Earnings will be reported on Tuesday.

This presents an interesting situation. Short term, the price and sentiment in AAPL looks to be changing. The volatility dropping and the professional gap, indicates on the chart that a change in trend is happening or about to happen. Prices can still drop, but the lows in AAPL may have been reached this week in the 94 area.

With the current options I have on around the stock, which expire in 7d, the one that needs to be looked at is the short call. This call is now going deep into to the money and has at -63 delta. That means for every additional $1 move higher, the short call is significantly holding the position back.

What can be done?

1) Do nothing. The position as a vertical spread is profitable and will reach maximum profitability by the end of the week. After earnings, implied volatility will crush premiums and the position will gain toward its maximum value of around +4100.

However, I want to continue in this trade.

2) Roll the option position forward. I can roll the short call over to the next week and look to move the strike upwards. The problem is that if I want to roll the call higher, I cannot do so unless I pay up for the call or roll further out in time. Because of the current high IV, I can wait until after ER (and take the chance that the calls become further in the money).

I like to not only roll the option forward in time, but also up in strike(s) to further allow more profit.

3) Sell the puts (which are now quite far OTM but still have value), buy the short calls back, and roll out to next week. The additional premium from the puts will help finance the short calls at a higher strike for around a 0 debit.

The problem that this presents is that the full downside remains unprotected, unless I purchase more puts.

Looking at the estimated move (EM) for the following week from this new price level the the range is approximately $6.80. Currently this puts the 95 put at the extreme end of the range. That along with time decay and volatility crush makes it statistically likely that the 95 puts will not have any value (or gain value above its cost for selling) after ER.

The price on AAPL looks to have bottomed (I know I could very well be wrong), but with volatility starting to come in and the professional gap, news is probably priced into the stock. ER could actually be a non-event.

Possible Trades

1) I can roll the collar up and out in time and by making the collar wider, I can have on a full protective collar with just a slightly lower breakeven for just a small debit. The amount of extra profit is negligible and only serves to extend the current collar trade with similar max profit and a worse maximum downside.

2) I can collapse the collar and sell a ATM call for around a 0 debit, greatly increasing my upside, still maintaining an -50 delta hedge in case the price does move back, but also put myself in a position to make more money (and have more opportunity to roll up and out again)

I would have no put protection in place, instead relying on a statistical probability that the downside has been tested. If the price begins to fall, I can roll down the call as I have done before, in effect selling a call spread and using the proceeds to then purchase a put for a floor on the position.

The choice depends on how much risk I am will to have, even temporarily. Remember, price will be ever changing so the opportunities will also change.

The account that this stock is held is a non margin account, so all trades need to be paid for by the options themselves, or by a combination of options and selling stock. I do not want to sell any of the stock position.


Part 1 - Roll the short calls out 1 week in time and sell the puts to help pay for it
-8c Jan 29' 95 Put @ 0.93
+8c Jan 29' 99 Call @ 4.48
-8c Feb 5' 101 Call @ 3.63
Net credit: -0.08

Part 2 - Wait to purchase puts ...

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