Sunday, October 23, 2016

AAPL-3 Hedge #1

Monday will have the account open with the following portfolio:

+10 shares AAPL @ average price of $104.90 (1050)
+74 200 cash

I will setup a new collar trade with these assets. I can repurchase more AAPL stock (a lower number of shares now that I have to buy around 117), but I will be able to have a very value at risk.

Earnings is coming up, which means there COULD me a large move in the stock -- either upwards or downwards. This is the event catalyst for the week.

There is a also a dividend payment coming up in early November, so I also want to make sure I am the owner on record prior to the stock's ex-div date. This date should be early in November.


Assume an opening price on Monday of 116.60, 74 200 will buy up to 636 shares.  Add to the existing 10 shares and that will be a total of 646 shares.

+636 AAPL @ 116.60

With 646 shares I will elect to hedge 600 shares and leave the 46 out. That is still 93% of the shares protected. Option contracts hedge in multiples of 100 shares.

What are the possibilities for the hedge?

- Keep protection to the downside as close as possible. This means buying a put strike that is close to the stock price. I can only purchase a straight put for protection (as opposed to a cheaper put spread)
- Sell calls to pay for the put
- Don't sell any calls, wait until after the event. Selling calls now can cap the upside should the stock jump significantly higher.

What is done here depends on the tolerance for risk and expectations of the stock.

Options are expensive (implied volatility) this week due to the earnings. A large move is possible, but not guaranteed. The ATM options for this week's expiration are indicating about a 3.00pt in the price either way. A range from 113-119.

I am going to use this as my guide.

I can place the 115-118 hedge for a slight credit

+6 Oct 28 115 Put @ 1.83
-6 Oct 28 118 Call @ 1.90
Net credit: -0.07/c

I can send all the parts of this limit order with these legs (x 6)

+100 AAPL shares @ 116.60
- 1 Oct 28 118 Call @ 1.90
+1 Oct 28 115 Put @ 1.83
Net debit: 116.53/c

The net risk on position is minimal compared to its value. A large downside move and the position will drop around $800 to $1000.  A large upside move will limits gains to around $1100.

What ever the move, there is either an opportunity to trade the hedge to acquire more shares, or take it to expiration just 5d away and collect maximum profit.


At the market open, AAPL was just over $117/share.  I was able to roll up slightly and purchase the collar at higher strikes. The residual shares purchased were down slightly from 36 to 31 due to the higher stock price. 

I want to keep the cash comitted as close as possible without having to add significant amount to it.

Here is the opening trade:

+600 shares AAPL @ 117.43
+6 Oct 28 116 Put @ 1.92
-6 Oct 28 119 Call @ 1.86
Total cost of the collar: 117.49 / 100 shares

+31 extra shares AAPL @ 117.44

Total value: (600 X 117.49) + (31 X 117.44) = 74 380
Total commissions: $13.42

The original amount of cash available was 74,200. A difference of $180.

641 shares AAPL, 6 Oct 28 116 puts, 6 Oct 28 119 Calls. 

Note that the cost of the protective collar cost is a debit of 0.08/c as opposed to the planned credit of 0.07/c.  This is due to the movement of the stock.

Here is the model payoff diagram with 4d to expiration. Notice that actual risk in the position for the expected move (pink bands) is less than $900. If the stock just moves slightly higher, the position makes just over $1100.  All this will be determined in the next 4d.

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