Tuesday, April 05, 2016

AAPL 2016 Update #80

Since the stock was re-purchased and the new collar established, AAPL has moved up to around the short strike of the collar.

This means that the profit potential for this particular trade is at maximum, once all the time value disappears from the option.

As predicted, volatility is the name is also starting to rise so even option premium is beginning to inflate like a balloon even if the stock does not move. Within a couple of weeks, option premium will begin to surge for the option series that is going to be expiring during the week of earnings. This is the event that is driving up prices.

So where is the position at this point?  Here is the P/L charts.

Fig 1 - Option Payoff Diagram

Originally this position was put on for a small credit when the stock was trading at 106. It is now one week later and the stock has jumped up to 110. Overall the position has made money (blue vertical line).

Two things have happened to the options -- the put option is now far out of the money (OTM) and is beyond the 1SD deviation line for expected moves to the downside (blue band). That means the put option has lost money -- remember its the insurance part.

The second is that the short call has gained value and is now at the money (ATM). Because I sold this call to pay for the put, that gain is negative and is a drag on the entire position.

What has made money is the stock position.

Remember there are two parts at play here - the stock position is positive delta and makes money when it goes up. The option positions (long put and short call) is a net negative delta and looses money when the stock goes up. But the stock is permanent and does not expire, the options will expire in about three weeks - if the price sticks to around 110 the options will go out worthless and the full profit will be realized (about $7600).

If I had a crystal ball I could have just bought stock and that profit would already be there. However, when this move up eventually stops (and it will), the options and the not stock will be in play.

The point of having the options is to define and reduce risk and use them to generate cash when the price goes down.

What now?

What I am thinking at this point is to just wait and see how the price behaves around this level as earnings come up. As earnings approaches the price will begin to stop moving and volatility rises. Time decay is also working in my favour.

I can also start to look at rolling out the short strike to try and gain an extra dollar or two in value.

I can also look at the rolling up the put strike to lift the "floor" of the position. That will cost money and cannot be done for 0 or a credit.

As of this morning, a roll (buy back Apr 29', sell out May 13') out two weeks in time would cost about 0.15/c.  In other words, spend 0.15 to make 1.00. That is not a bad risk-reward (Fig 2)

However, as time value burns in the short call, that roll might able to get done for 0.0 debit or a slight credit.

Fig 2 - Two Week Roll 110 to 111

The worst case is that the stock closes above the 110 strike, stock is called away again and the position is restarted (again!) when the market opens.

Until then, time value of the options are decaying for a net profit of $15 USD/day and increasing for the next 3 weeks.

Remember this trade has been going on for 1 year and 1 month and the stock is still $20USD/share below my entry price. 

Without hedging the position is not even at break even yet.

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