(DISCUSSION) AAPL August 2013 trade

[Mikael]

yeah, basically i always try to take profit around 15-20% range. i don't wait on Kim's alerts for closing the trade, i just close it when it goes into the 15-20% range.

Edited June 26, 2013 by Mikael

[Kim]

I don't think that not taking profits at 10% was a mistake. When you have profit targets, you have to stick to them. My profit target on calendars is 20-30% and most of the time we get there or very close (see IBM, CF, LNKD, previous AAPL trade and RUT trades). Obviously if you aim for 10% gain, you cannot afford for the trade to lose 30-40%. While the current situation with AAPL is definitely not pleasant, but when you aim for 20-30% gain, you should be ready for some occasional 30-40% losses. If you cannot accept this, then set your profit targets lower and cut the losers around 15-20% as well. Higher reward goes with higher risk, this is why I encourage members to set their own targets based on your risk tolerance.

 

Not to adjust earlier was obviously a mistake, and we could also manage this trade better. Adjusting a double calendar is usually easier (you just sell the further strike and move the tent in the direction of the stock), and this is why of the reasons why I prefer double calendars for SO trades. A lesson for next time.

[Kim]

all three indices are up nearly one percent today, and AAPL is down ~1.25%. perhaps in the future we can avoid calendar/condor candidates surrounded by negative or positive sentiment. any bit of negative news seems to pin this one to the floor lately. 

Hindsight is always 20/20. When we entered the trade, the stock was stuck in 440-460 range for few weeks. We also played it in the same way in the previous cycle for 25% gain.

 

You can always find reasons why you should not trade something after it tanks, but decisions are based on facts known at the time the trade was initiated.

[Ice101781]

okay, enough ranting about what's past.

 

in all seriousness, what is our stop-loss here? the calendar is down over ~40-45% currently...are you looking to close out down 50%? 60%?

 

with two back-to-back up days in the markets, and the increased volatility all-around, tomorrow could be painful for this trade. 

 

it seems the options are 1) continue to wait

 

                                       2) close the trade and cut our losses

 

                                       3) close the 410 put calendar and open the 400 put calendar - though I'd really hate to throw any more good money after bad, and the P/L graph doesn't look favorable anyway.

 

 

so it seems the logical thing to do would be to close the trade now, or at least have a maximum loss target in mind.  

Edited June 26, 2013 by Ice101781

[Kim]

The stock is now down over 12% in just 3 weeks. The RSI is at 23. How low can it go? I have no idea. However, I do think that at those levels, there is a good chance of at least some technical bounce. Plus we have the August calls IV playing in our favor. The 410 calendar is currently down 0.50, but even a small bounce will put it in a positive territory. We can then close it and roll to next week 400 calendar.

 

There are no guarantees, and the loss can become even larger. But we need to play probabilities, and probabilities tell us that the chances of some bounce are greater at those levels than the chances of the stock going even lower. Of course I might be wrong, but I'm going to take my chances and continue holding.

[Ice101781]

I understand all of your points, but still no guidance on a stop-loss target? lol. 

[Kim]

Update: I promise to do a post-Morten of this trade when it's over (and I can tell you it won't be pretty). But right now I don't see a point to close it. All the arguments that I mentioned are getting even more convincing with the stock at 395 (again, it doesn't mean it cannot go lower), and the long 450 calls will have value and probably slightly increase even if the stock goes another 10-15 points down. I will likely close the 410 calendar tomorrow and might open the 400 calendar one week further.

[indiana*josh]

Update: I promise to do a post-Morten of this trade when it's over (and I can tell you it won't be pretty).

 

One aspect the post-mortem might address is position sizing.  The adjustment calendar increased our capital at risk by about 40%.  Those already holding a full position (e.g. 10% of one's portfolio) have now well exceeded our position sizing guidelines.  In addition to the trade being down over 60%, the loss now represents nearly 10% of my portfolio value.  My goal was to use proper position sizing to avoid a single loss consuming more than 2-3% of the portfolio.

[Kim]

100% true, and I'm in the same boat as you are (I'm sure it's no relief for you).

 

One clear lesson from this trade: when you trade a non-directional trading, never rely on your opinion about the direction to manage the trade. I'm trying to follow this simple rule in all my trading (the recent RUT and IBM trades are good examples), but we all are just humans. In this case, I just relied on my opinion "cannot go any lower" and we all are paying the price.

[Marco]

Here my personal post mortem.

I think I missed the point to adjust the trade, which usually I would have done somewhere at 425 the latest. But against my usual rules I decided that AAPL was due a bounce and did hold on to it. At 410 I was seriously annoyed with myself that I didn't adjust the trade but refused to adjust it then - when Kim did. Clearly getting stubborn and emotional here, which doesn't happen to me very often anymore however when it happens its usually when I don't follow my trading plan. So that was a good reminder for me to stick to the plan and adjust when I thought I would when I put on the trade. Anyway when I saw AAPL breaking 400 on a day where SPY was pretty firm after underperforming for quite a few days I decided I don't know what's going on with the stock and that I finally have to cut this position. I was way past the point of adjusting it and I had become way too emotional with the trade. So I cut yesterday at about 58% loss.

[lc_match-aka-Bill]

What was the original "adjustment" intended to accomplish in terms of trading strategies and greeks?  And what will be the intention of tomorrow's roll?

[Kim]

The idea was to slightly reduce the positive delta but mostly to add some positive theta.

 

I probably will not be adding any adjustments after closing the 410 calendar today. The stock became too unpredictable, and "cannot go any lower" assumption doesn't work anymore (well, actually it never really worked).

[barefoottrader]

AAPL is a broken stock without a clear trading range. Good stock for directional/lottery ticket trades, but not good for income trading. I'm avoiding it for now. 

[Hannes Kury]

Kim,

 

what are you looking for when you exit the 410p calendar today? What is the best case? 

[Kim]

Well, the best case is obviously the stock rallying to 410 - probably not going to happen today. But if it goes to ~400, we should be able to get around 1.50-1.70. Right now the mid is around 0.90, I think the downside is no more than .20-.30. I will be looking to exit around 1.50, if we are not there around 3pm, I will sell for whatever I can.

[Kim]

I'm out of the 410 calendar at 1.50. Not going to make another adjustment.

[Guest jozsika]

I don't think that not taking profits at 10% was a mistake. When you have profit targets, you have to stick to them. My profit target on calendars is 20-30% and most of the time we get there or very close (see IBM, CF, LNKD, previous AAPL trade and RUT trades). Obviously if you aim for 10% gain, you cannot afford for the trade to lose 30-40%. While the current situation with AAPL is definitely not pleasant, but when you aim for 20-30% gain, you should be ready for some occasional 30-40% losses. If you cannot accept this, then set your profit targets lower and cut the losers around 15-20% as well. Higher reward goes with higher risk, this is why I encourage members to set their own targets based on your risk tolerance.

 

Not to adjust earlier was obviously a mistake, and we could also manage this trade better. Adjusting a double calendar is usually easier (you just sell the further strike and move the tent in the direction of the stock), and this is why of the reasons why I prefer double calendars for SO trades. A lesson for next time.

 

I have problems with exiting the trades too, so I use this post to ask some questions.

 

You say "...we get there or very close..."

 

What does this mean? That you "almost win" (of course it doesn't count :-) or that as you approach your target you tighten your stop or do you place a training stop or what?

 

"Obviously if you aim for 10% gain, you cannot afford for the trade to lose 30-40%" This is not obvious for me at all. If, e.g. your w/l ratio is 10:1, then aiming at 10% gain (10 of them) with an occasional 40% loss seems a rewarding, low-risk strategy.

 

Do you have this type of tabulated hypothetical results for your trades?

 

Or to put it differently: *how* can we 'dial in' our risk/reward tolerance? We do need some guidance from you. Maybe a high/low/medium risk target and similarly for a stop when you enter the trade (or as the trade evolves.)

 

"Higher reward goes with higher risk, this is why I encourage members to set their own targets based on your risk tolerance."

 

Let's assume that my risk tolerance is infinite (maybe because I trade with a small percent of my total portfolio or maybe I like to live dangerously, whatever.) Do you think that if I am willing to accept 100% "occasional" loss, can I set my profit target to 1,000%? Probably not.So it is not *entirely* true that we should use our personal risk/reward profile. It got to do something with the actual trade, no?

 

I agree that we shouldn't crowd the exit (maybe we shouldn't crowd the entry either?) but we do need some help from you.

 

Thanks,

 

--joseph

[Kim]

Very good points Joseph, and I'll try to answer.

 

First of all, the profit targets and probabilities of success are different for different strategies and can also vary in different markets. For example, in relatively slow and low IV markets I will aim for 10-15% in earnings straddles, but I might increase it when I see that the markets become more volatile. Some strategies like ICs are easier to evaluate, so lets use the IC as an example.

 

If you trade 10 deltas IC, you will make around 10-15% in a winning months and your winning ratio will be around 80%. You absolutely cannot afford to lose more than 15-20% in you losing months. For example:

10%*9 winners=90%

30%*3 losers=90%

Net results: zero.

 

With 90% IC, you probably will not make more than 4-6%, so one 50% loser will erase all your gains.

 

With calendars it is more problematic to calculate the probability of success, but the winning ratio is probably in the 60-70% range. I would even say that 70% can be considered excellent by all standards. It is definitely not even close to 90%. So 10% profit target with occasional 40-50% losers will not work. While there is nothing wrong with taking profits at 10%, to me, it will require to adjust much earlier and not to allow the trade to go to the 30-40% loss range.

 

When I say "we get there or very close", I refer to the results of the calendars this year:

IBM: +18.3% and +14.0%

CF: +36.0%

LNKD: 32.8%

NFLX: 17.6%

AAPL: +25.8%

CRM: +43.3%

RUT: +12.6%, +25.6%, +19.3%, +30%, +14.0%

 

We had couple losers as well, but overall the results are in the 20-30% range. It doesn't mean we can "afford" the AAPL 50%+ loss which is unacceptable, but imagine that most of our winners were in the 10% range - this would make the AAPL loss much more painful.

 

When exactly to take profits involves some judgement call in many cases, and I always share my thoughts in each trade. For example, I described exactly why I took profits in the last RUT IC - the risk/reward at 20% gain was much favorable. However, over time, members might develop their own guidelines which might be slightly (or very) different from mine.

[Kim]

AAPL is a broken stock without a clear trading range. Good stock for directional/lottery ticket trades, but not good for income trading. I'm avoiding it for now. 

With proper adjustments, even after 12-13% drop in the stock the trade would be still around breakeven. I will do the full analysis after we are done, but here is a short summary:

 

450 calendar opened at 5.50 on May 31;

Rolled to 430 calendar on June 18 (stock at 430) for 0.60 debit;

Rolled to 410 calendar on June 21 (stock at 410) for 0.35 debit.

 

Total debit: 6.45

The 410 calendar is worth today 6.45.

[indiana*josh]

OK, I made a stupid mistake.  I thought I sold the adjustment calendar (the 410 put calendar), but apparently I was still holding 1 contract when the front option expired on Jun 28.  I was assigned 100 shares of AAPL over the weekend, and I paid $410 per share.  However, I am still holding the long Jul 5 put, so I guess I can turn around and sell those shares for $410 this weekend, right?

 

The value of the shares plus the value of the put roughly equals the $41,000 cash that is now tied up in this.  Should I just close it all to get my money back?  If I hold another week through expiration of the Jul 5 option, then in the worst case, I get my $41K back for the shares and the put option expires out of the money and is a total loss.  But that's no worse than just selling everything now, and there's the possibility I make a little extra if AAPL goes above 410, right?  Am I overlooking some other risks here?  I've never been assigned before.

 

Thanks!

Josh

[Kim]

I would probably close now both the shares and the puts. You will do slightly better than me by closing today since the stock popped.

[Marau]

Help me get an education, folks.  I understand "buy it as a spread, sell it as a spread," delta neutral trading, etc in theory.  It's the practice I have trouble with.

 

On this spread, we sold the Jul 450 call for about $17.00 and it's now worth about $0.70.  With the stock around $400, digging out of our hole can only be done by the long 450 (Aug).  It seems to me that the short call can only hurt us if the stock pops, and with a delta around 6% won't make us much if the stock keeps dropping, especially considering the 15% delta on the long.  Why wouldn't we close it?  What am I missing? 

Hi Kim

 

Sorry for bringing this conversation again; but now we can buy the July 450C for +- 0.50. Wouldn`t it be a good shot rolling it to july26 and take some money off the table?

[Kim]

Hi Kim

 

Sorry for bringing this conversation again; but now we can buy the July 450C for +- 0.50. Wouldn`t it be a good shot rolling it to july26 and take some money off the table?

By doing this, you will reduce your risk but also significantly reduce the profit potential in case the stock continues higher. The current position will be breakeven around 425-430 (assuming constant IV), if we roll, we basically lock the loss.

[indiana*josh]

Wow, this is back to being in the range of acceptable losses.  Is it too much to hope that we may break even on this trade?  Tempted to sell now to lock in the smaller loss and avoid a reversal.

[Kim]

The breakeven is around 430 now, assuming IV unchanged. Since the trade started, the IV of August options is basically flat - this should start changing soon. IV of earnings month options for AAPL just cannot stay at 28%. Historically it was in the mid to high 30s. Projecting 5% increase 10 days from now will move the breakeven price to 420.

[Ice101781]

Kim, how did you calculate that a 5% move in IV would shift the BE price to 420?

[Kim]

Kim, how did you calculate that a 5% move in IV would shift the BE price to 420?

I did not calculate it, the software did it for me

 

But in fact it is pretty easy: at 4.80, we are currently at .70 loss. Including the .60 loss from the hedge, that's 1.30 loss. Vega is .30, so each 1% IV increase will increase the value of the trade by .30. .30*5=1.50 - a small gain actually.

[Ice101781]

ah, okay - makes sense, thanks Kim. 

[Ice101781]

stock's in a nice uptrend -- now, if only the IV of the August options would kick into high gear...

[ykotowitz]

Coming close to breakeven. Do yo have any thoughts on bailing out soon?

[Kim]

Still waiting for IV spike in August options. Should come soon, we are 2 weeks before earnings.

[Ice101781]

I'll most likely be holding until July expiration. There's a couple of possible scenarios at this point. The ideal is that AAPL stock continues its uptrend regardless of the overall markets' moves, and IV increases significantly leading up to earnings. With a bit of luck, we might actually have a small gain. 

Edited July 9, 2013 by Ice101781

[Ice101781]

One issue is that AAPL stock may move in lockstep with the overall market. If that happens, a move up for AAPL means our July VIX fly continues to crater. I think it's going to be important to roll the fly to August as Kim suggested. 

[Kim]

This trade is recovering nicely. I'm still holding it for two reasons.

 

First, the short options still have 0.40+ of premium. This premium should be gone in the next few days.

Second, the IV of August options is actually down almost 2% percentage points since we started the trade. This is VERY unusual less than 2 weeks to earnings. The IV is now around 27%. Last cycle the IV of monthly options was 33% 2 weeks before earnings and reached 41% a day before the release. Previous cycles it was even higher. I don't believe it can stay at those levels much longer.

 

The risk of course is a sharp reversal in the stock price.

[Ice101781]

I agree, but I think your last sentence says it all. it seems the market believes this AAPL rally won't last. the analyst upgrade(s) gave us a nice bump though. here's to a bit of luck.  

[Dawajmeister]

Okay I'm wondering if I should take my profit and exit, or try to ride it out a big longer for the IV increase.  I was in the original July/Aug 450 Call calendar.  I bought back the short side on 06/28 for .37.. leaving a profit of 17.12 - .37 = $16.75 or total gain of $3345.

On the long side I have averaged my cost down when AAPL dropped and am sitting on a loss of $4.55 or $2734.  or a net gain of $611.  I only have the long side of the calendar left. I understand that I made this a directional play, but am trying to decide if the IV increase will offset any potential drop in price.

[Dawajmeister]

Just saw your post Kim, what I was figuring.. a sharp drop in price would kill my trade right now.

[jfouche]

I'm a little tired of AAPL, but this looks like a big buying opportunity for the volatility. 

[Ice101781]

I bought back the calls a bit earlier

[indiana*josh]

Is the profit target on this still 20-30%, or are you thinking after the huge roller coaster ride of maybe just taking profits at this point?

[Kim]

I'm looking to close it soon.

[indiana*josh]

If we aren't going to close this today, would it make sense to buy back the July calls.  They are trading around 15 cents right now, so no longer providing much balance in case AAPL tanks, and if AAPL continues climbing we'll be better off without them.

[Kim]

Yes, you can do that. It's now a bit late to send the alert, but I think we can do it tomorrow as well. 

[Ice101781]

another thing to consider is that AAPL will be paying a dividend sometime in mid-August. the stock saw a nice run-up leading up to the ex-dividend date last cycle. these calls might be worth holding onto for a while, barring a strong correction in the overall markets. consider also that IV for these calls is still ~27%...at this point, there does not seem to be a high risk for a vol crush after earnings are reported.

[Kim]

Yes, IV is still very low and it should rise as we get close to earnings. I know that I sound like a broken record, but 27% is less than in some non-earnings months. It's almost like there is no earnings. Week4 option that expire right after earnings are trading at 38%. I would actually consider doing a calendar August/week4 - I think it was NEVER that cheap, not even close.

 

That said, there is no way I will hold it through earnings.

[Kim]

Price risk.

[Kim]

Just closed the short calls for 0.09.

 

The August 450 calls are trading at 4.80 with IV at 28%. Just to show how ridiculous this price is, I went back to check the prices in the previous cycles.

 

In April cycle, a week before earnings the stock was trading at $426 (similar to the current price). The 450 May calls were priced at $8.40, with IV at 36%. 

In January cycle, a week before earnings the stock was trading at $485. The 515 February calls were priced at $12.40, with IV at 42%. 

 

So in terms of IV, I believe it should go up at least 3-5 points. The stock price is obviously still a risk.

[Kim]

I actually was considering it. It would flatten the P/L chart and significantly decrease the profit potential if the stock goes above $430. The risk will be reduced as well if the stock goes below $420.

[Hannes Kury]

Kim,

 

if you are right that would make the straddle (Aug 425 or so) a opportunity. Right?

[Kim]

The August straddle is priced at 6.8% IM which is WAY cheaper than previous cycles. But maybe the markets expect much lower move than in previous cycles, and this is the reason for the cheap price.