Wednesday, April 27, 2016

AAPL 2016 Update #87 (Stock Purchase - Post Earnings)

Earnings were released yesterday for AAPL. The stock moved HUGE on the results -- in fact the options market didn't get this one correct.

AAPL will be opening down about 8% which is twice the expected range predicted by the ATM the options. This is unusual as the volatility premium of the options usually underestimate the move. However, that does not mean it can't happen.

Where AAPL will be opening up this morning is right the daily the demand zone marked in the lower part of this chart.

Fig 1 - Daily Demand

The swing by AAPL in the last two weeks is a tremendous move from the 112 down to the 96-97 area - a good 15pts high to low.

So what happens now?

There are two parts to the position that was placed yesterday -- the long put at the 98.5 strike and short calls at 104.

Let's look at the long puts first.

This move down is a gap that on the opening will move past the 98.5 strike. It would have been nice to have puts at a higher level, but that trading. On opening of the market, the puts will have maximum value but will quickly decay. The decay happens for two reasons: time value (only 3 days left in the options lifespan) and the event is now over. Volatility in the options across the board will get crushed.

Now the short calls.

The short call at 104 will be essentially worthless, nearly zero. This will realize maximum profit. Unfortunately, as the stock declines, the short call becomes less of a hedge. With a gap of 7pts, the hedge "effectiveness" is not working very well after the first 2-3 dollar move. Short calls work better when the stock moves slower.

Also because the "event" is now over, option premium will decline (crush) and the rolls will not be worth as much.

So in the end, this move was outside the expected range and because the hedge was not very tight (put and call closer together), the net result will be that less of that 7pt downward move will hedged.


Part 1 - Immediately sell the puts at the open
-8c Apr W5 98.5 Put @ 2.81
Net credit : 2.81 - 0.47 = 2.31 credit

Part 2 - Roll the calls down to current ATM
+8c May W1 104 Call @ 0.04
- 8c May W1 96.5 Call @ 1.44
Net credit : 1.40

Total credit received: 3.70  (this is about half of the price move down)

Part 3 - Purchase stock
+33 shrs AAPL @ 96.77

Total position value is 841 shares of stock.

The P/L dropped significantly on this move. But at expiration assuming the stock remains at 96.5, the position will still be up +2.5K.  Remember the stock is now 35pts below the entry price of this position from last year. 

The break even is down to 93.59 and the stock is opening in a demand zone.

If the stock can stay here or move just slightly up for the next week, the position will be fine. This is a long term trade where I want to ride the moves up and and down.

Dividend for the stock will be released after May 12th.

This is the current P/L payoff diagram with the latest adjustments.

Fig 2 - Payoff 9DTE after "AAPL Earnings"

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