Thursday, April 14, 2016

AAPL 2016 Update #82

AAPL for the last few days is now showing strength. It is testing 112 level for the second time. Overall, it appears AAPL has a bullish run in it and is wanting to move higher.

Rolling down the call to the 109 level is limiting the profit potential of this run. The roll down allowed me to purchase more stock, but I would like to now move the short strike up and capture some more potential profit.

To roll out the 109 strike, I will need to go out in time so I don't have pay for the roll. With the 109 strike now being deeper in the money, this means I will need to roll further out in time -- probably to the end of May to capture another 1pt strike. While this is okay to do, I don't want to wait that long to capture time decay (30-35 days is where time decay really starts to kick in).

The other option is to sell out the put to raise some additional funds to help roll up the short call. In doing so, I will be removing the floor of protection from the trade. However, the trade has now moved up so much that the 102 put is statistically useless given the current 1 SD expected move.

Rolling up the call still keeps a large negative delta (-60) against the position. The short call will be just slightly in the money / at the money. This affords protection to the position in case of a move backwards.

The net result is now just have a position that is a covered call, with the call being near current price. No put protection is present.

It also creates slightly more upside for the position and keeps the days to expiration low. Just one more week out, as opposed to a month or more of time.

Trades - 

This is done on a single ticket as a combination order, three legs. Net commission is $15 using IB. Using a regular bank broker this would have to be done on two tickets and would cost over $40 (ticket charges + contracts)

-7c Apr 29' 102 Put @ 0.55
+7c Apr 29' 109 Call @ 4.71
-7c May 5' 110 Call @ 4.21
Net Debit: -0.05/c (credit)

Here is the resulting risk graph (covered call) with the 1 SD and 2 SD bands shaded. The expected move (EM) to the downside with 23d to expiration is about 104-105. The EM to the upside is just under 121.

Time decay (theta) is being collected at $50USD/day and accelerating toward expiration.

With earnings coming up, the stock will soon settle and option volatility will begin to come down. Where is settles is unknown.

If the stock drops, I can roll down the short calls capture premium and/or buy puts again. If the stock moves up I can roll out in time (if practical) or just let the stock get called away and collect $8K in profit - all in the next 23 days.

I will watch to see how the stock reacts around earnings.

Fig 1 - Covered Call (Stock + Short Call)

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