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Kim

(DISCUSSION) AAPL August 2013 trade

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I'm looking to add some positive theta to the portfolio.

 

Looking at AAPL, we can see that it is stuck in the 430-470 range in the last few weeks. I don't see any catalyst that will take it much higher or much lower before the next earnings. I'm looking to enter the August/July 450 call calendar, currently trading around 5.50.

 

This is a trade that will do best if there is not much movement between now and July expiry. Since August captures earnings, the options will hold value much better than July as time goes by in the next month. The IV of August options is still pretty low at 28% and it expected to increase as we get closer to earnings. VXAPL which is AAPL volatility index is at 27.30 which is very low compared to historical levels.

 

The time frame for this trade is around 2-4 weeks and the profit target is 20-30%. I'm planning entering in the next few days. We did a similar trade 3 months ago and closed it for 25.7% gain. This time the IV is even lower and it should benefit the trade.

 

P/L chart is attached.

 

post-1-0-99385100-1369928864_thumb.png

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One potential catalyst for a price move is their upcoming developers conference (WWDC).  It's June 10-14 this year.  It's usually software-oriented news that gets announced at these conferences rather than device announcements.  Doing a quick check over the past three years shows the stock price didn't move much around this event.  That said, still good to be aware of it.

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this calendar is a short vol play --- wouldn't we want to sell volatility when it's 'high' or expensive, rather than when it's 'low' or cheap? 

No, it's long vega like all calendars - look at the P/L chart attached.

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I got in on this one at 5.45, Kim, what should my target be on this? Still the 10-15% range? I am wondering if due to the down market today, is there simply a natural IV spike that I should just take advantage of and cash out. 

 

On a side note, isn't it common that when there is a significantly down day in the market like we have today, IV for most stocks would naturally rise? Wouldn't that be logical to happen or am I mistaken?

 

Looking forward to your thoughts and keep up the great work. 

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What are the odds of retaining a portion of the spike. I realize that it might be highly unlikely for it to completely be retained, but i was thinking a portion might retain. 

 

Also, even tho you are shooting for 20-30%, would I be hurting myself if I were to shoot for 15%? 

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AAPL IV did not spike today. There is not always a direct correlation between general IV and individual stocks IV.

 

You should do what works the best for you. If you are happy with 15% gain, by all means take it.

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Kim I closed out for 6.1 as well. Regarding the IV spike, it is my understanding this kind of calendar trade will benefit if the stock doesnt move much. If the IV spikes that would indicate a sell off wouldn't it? In that case wouldn't the trade suffer a loss? Granted that is only if the spike corresponds to a change in stock price that would be sufficient to affect the calendar.

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Kim I closed out for 6.1 as well. Regarding the IV spike, it is my understanding this kind of calendar trade will benefit if the stock doesnt move much. If the IV spikes that would indicate a sell off wouldn't it? In that case wouldn't the trade suffer a loss? Granted that is only if the spike corresponds to a change in stock price that would be sufficient to affect the calendar.

Correct. However, in our case, the long August options are after earnings at end of July, so the expectation is they will keep the IV relatively high compared to per-earnings months.

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The stock is 3% from the strike which is still fine. The IV of the short options is down around 1% while IV of the long options is almost unchanged, plus the theta is around 0.5% per day and we are 12 days in the trade.

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Bear in mind that AAPL made a pretty clear pinning move today to stick to $430.  The price could be unnecessarily low.  Monday will likely tell.  

 

We still have a fair amount of time before earnings and before expiration and the trade is still pretty healthy.  Why not wait a little and see?

 

Of course, it is time to watch a little more closely for good reasons to adjust/hedge/close... And I bet those who took profits around $6.10 are feeling good!  

 

As for me, I'm content to wait a little longer.

 

Thoughts?  Kim?  Others?

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One thing that we need to remember is that P/L chart assumes constant IV. In our case, the IV of August will start increasing as we get closer to earnings. So the breakeven points will be wider as well. I'm still holding and will stick my my original 20-30% profit target for now.

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Update:

 

The IV of August options are still at ridiculously low levels of 26-27%. As we get closer to earnings, it should get to the 33-35% area. Right now I'm not concerned at all about the price action - even a small bound to the 433-435 area combined with gradual IV increase should bring us to the 20-25% gain range.

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Guest Hal

Thanks, Kim. I'm curious about your statement that the IV levels are "ridiculously low". What would be a more "normal" IV for the August options? And is this based on a generic IV that Apple options have historically shown two months prior to expiration, or some other calculation you're doing?

I assume any backtesting site/software could give us the information, I'm just not entirely sure how I would construct the query.

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Guest Hal

Thanks. I don't have TOS, but I assume Optionslam would probably give us the same thing. I'll poke around and see. 

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I'm watching the trade very closely. Normally, I would adjust much earlier - however, I feel that the stock is very oversold at those levels, and August options IV should start rising very soon which will help the trade to recover. I know this is against the rules, but sometimes you need to "bend" the rules a little bit and make a judgement call.

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I'm watching the trade very closely. Normally, I would adjust much earlier - however, I feel that the stock is very oversold at those levels, and August options IV should start rising very soon which will help the trade to recover. I know this is against the rules, but sometimes you need to "bend" the rules a little bit and make a judgement call.

yes felt the same, now having second thoughts as this market seems unable to recover from what I thought was a good base to bounce a bit  :unsure:

well fingers crossed ....

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Just made an adjustment, bought 410 put calendar at 2.10. This will increase our maximum investment by ~35%, but significantly increase the positive theta. It will reduce the gains in case of significant rebound, but I feel that at this point we need to do something to stop the bleeding.

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Guest Hal

Hi Kim,

 

I didn't manage to get the 410 put calendar in time on Friday, and AAPL looks to open significantly lower today. Looks like I need downward protection from the original position. Suggestions? Should I adjust the strikes on your put calendar?

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Guest Hal

With AAPL at 403, the June 28/July 5 Put calendar is now at 1.75/2.30 B/A (midpoint 2.05). Do you think this is still the best play, or might the 4.05 calendar be better? I have no idea whether AAPL has hit bottom or has further to fall.

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Guest Hal

Since my last post, AAPL has fallen further, and is approaching the 400 mark. Now a 400 calendar is starting to enter into the picture. Can you please help me understand the variables involved in choosing an appropriate strike point for this trade? Thanks.

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Your maximum gain of the calendar is at the strike - so the lower the strike, the better downside protection you have, but you start losing money on any meaningful bounce. Where the stock goes from here? My guess is as good as yours. I think that $400 might serve as an important psychological barrier, and the stock is already significantly oversold, but you never know.

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Guest Hal

Even though AAPL is at 402, I went for the 410 b/c I was able to get in at your price, and I want to track the trade alongside you and other members. My sense is that if you were to do it today, you would likely have chosen the 405 strike. Am I right?

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Kim,

 

looking back I wonder how I could have prevented the large negative balance on this trade. Is there a way I could have stopped the bleeding, maybe when the stock was around 410/415? With the RUT we bought OTM options further out, could one do something similar, and, if yes, how do you find the right puts?

 

Hopefully the trade will recover some. What is your take on it now?

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Buying puts would significantly reduce our positive theta which was already almost negative with the stock around 420. But buying slightly OTM calendar would be probably a good idea. I did it at 410, a bit later than I usually do. At this point the trade doesn't look good, but any bounce will cause a significant recover, and IV of August already starting to rise.

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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? 

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Not a bad idea. However, remember that our original cost on the whole calendar was 5.50 so closing the short call at 0.70 you give up an extra 12% of gains. Sure if the stock rebounds strongly, the call will increase in value, but the whole structure will have very nice gains and this is what important. If the stock stays at current levels, by letting it expire we will get an extra 12%.

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 If the stock stays at current levels, by letting it expire we will get an extra 12%.

 

But the theta of the 450c long (-0.11) is larger than the theta of the 450c short (-0.07). Doesn't that mean that the whole structure looses more as time goes on. We get an 12% from the  short and loose ~20% on the long?

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Yeah, OK, I can see Kim's point.   My ASSUMPTION would be that we treat it as a unit.  If we're happy letting the short expire and the long option run, well, OK, I get it.  It's just an unusual strategy for SO.  But, then, unusual situations call for creative (if traditional) solutions.  I'm in.

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But the theta of the 450c long (-0.11) is larger than the theta of the 450c short (-0.07). Doesn't that mean that the whole structure looses more as time goes on. We get an 12% from the  short and loose ~20% on the long?

 

I believe if AAPL pops, then the put side of the calendar's delta's will also decrease as it gets further out of money. 

 

Suppose AAPL pops to the 425 range by July expiry, then the short July 410 put will expire worthless while the long July 410 put will be still be worth something; same goes for the July 450  and August 450 call pair. 

 

Using AAPL's last 30 day HV of 20% and option calculator, by July expiry, AAPL August put will be worth about $3.84; while AAPL August call will be about $2.21 while your short options will expire to 0; making the calendar profitable. 

 

Of course, this is close to the optimal price trajectory and also assuming that the IV of AAPL will hold during the time; but this is the thesis of the trade, that AAPL will not fluctuate too much while its IV will slowly increase as it approaches its earnings date. 

Edited by PaulCao

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Oops. Yeah, I was doing calculations for 450/410 July-August double calendar. 

 

So going to the official SO trade, suppose on the June 28 expiry, AAPL is at 425; doing calculations based off IV of 30 (Apple's current IV) and a dividend yield of 3% (Apple's current dividend yield), 

 

Short June 28 410 puts will expire worthless, 

Long July 5 410 puts will be worth $1.903

Short July 19 450 calls will be worth -$3.656,

Long August 16 450 calls will be worth $8.665 

 

So overall calendar spread will be $6.91 on that hypothetical scenario. Used the options calculator here: option-price.com. 

 

Best,

PC

Edited by PaulCao

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This trade is becoming toxic - I envy the guys that got out at 6.10!

 

Got to keep emotion out of it.....  Trust me there are many times, when I get out and take profit, only to see it go another 15%.  This is just another lesson about proper allocation per trade. There always will be losers.... 

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    • By Ophir Gottlieb
      There is a bullish momentum pattern in Apple Inc (NASDAQ:AAPL) stock 2 calendar days after earnings, if and only if the stock showed a large gap up after the actual earnings announcement. 

      This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum. The event is rare, but when it has occurred, the back-test results are noteworthy. 

      Apple Inc (NASDAQ:AAPL) Earnings 
      In Apple Inc, if the stock move immediately following an earnings result was large (3% or more to the upside), if we test waiting two-days after that earnings announcement and then bought a three-week at the money (50 delta) call, the results were quite strong. This back-test opens two-days after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally. 

      Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings: 
       
          Rules  Condition: Wait for the one-day stock move off of earnings, and if it shows a 3% gain or more in the underlying, then, follow these rules:  Open the long at-the-money call two-calendar days after earnings.  Close the long call 14 calendar days after earnings.  Use the options closest to 21 days from expiration (but more than 14 days). 
      This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. This is not a silver bullet -- it's a trade that needs to be carefully examined. 

      But, this is a conditional back-test, which is to say, it only triggers if an event before it occurs. 

      RISK CONTROL 
      Since blindly owning calls can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain. 
       

      In English, at the close of every trading day, if the call is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is a stock rally early in the two-week period rather than waiting to close 14-days later. 

      Another risk reducing move we made was to use 21-day options and only hold them for 14-days so the trade doesn't suffer from total premium decay. 

      RESULTS 
      If we bought the at-the-money call in Apple Inc (NASDAQ:AAPL) over the last three-years but only held it after earnings and after an earnings pop higher, we get these results: 
       
      AAPL
      Long 50 Delta Call   % Wins: 80%   Wins: 4   Losses: 1   % Return:  151.9% 
      Tap Here to See the Back-test
      The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger). 

      Looking at Averages 
      The overall return was 151.9%; but the trade statistics tell us more with average trade results: 
            ➡ The average return per trade was 46.54% over each 12-day period. 
            ➡ The average return per winning trade was 76.92% over each 12-day period. 
            ➡ The average return per losing trade was -75% over each 12-day period. 
       
      WHAT HAPPENED 
      Bullish momentum and sentiment after of earnings can be quite powerful with the tailwind of an earnings beat. This is just one example of what has become a tradable phenomenon in Apple. To identify patterns that have repeated over and over again, empirically, we welcome you to watch this quick demonstration video: 

      Tap Here to See the Tools at Work 

      Risk Disclosure 
      You should read the Characteristics and Risks of Standardized Options. 

      Ophir Gottlieb is the CEO & Co-founder of Capital Market Laboratories. Mr Gottlieb’s learning background stems from his graduate work in mathematics and measure theory at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by Yahoo! Finance, CNNMoney, MarketWatch, Business Insider, Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire, Barron’s, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television. He created and authored what was believed to be the most heavily followed option trading blog in the world for three-years.This article is used here with permission and originally appeared here.
    • By Kim
      Given the power of stock options to leverage your investment dollars, you might be tempted to bet on the AAPL earnings report coming out today by buying Apple calls (if you think the stock is going up) or Apple puts (if you want to bet that it will go down).
       
      That bet paid off handsomely in July 2016 when Apple reported earnings. The stock rose 6.5% the next day and the value of Apple’s weekly calls increased dramatically.
       
      But that’s the exception, not the rule.
       
      As I showed in one of my Seeking Alpha articles, buying either puts or calls just before Apple’s earnings report is, on average, a losing proposition.
       
      When you look at longer timeframe, AAPL tends to move less than expected. Take a look at the screenshot from optionslam.com, showing the post earnings movement of the stock in the last 10 cycles:
       

       
       
      The explanation for those numbers is simple. Over time, the options tend to overprice the potential post-earnings move. Those options experience huge volatility drop the day after the earnings are announced. In most cases, this drop erases most of the gains, even if the stock had a substantial move.
       
      The last column shows the one day post earnings performance of the weekly straddle. As we can see, it has lost money 8 out of 10 times. Which means that 8 out of 10 times the stock moved less than expected. If I had to choose, I would take the other side of the trade (selling those options).
       
      Jeff Augen, a successful options trader and author of six books, agrees:
       
      "Trying to predict the future is like driving down a country road at night with no headlights on and looking out the back window." - Peter Drucker
       
      Related articles:
      Is Your Risk Worth The Reward? Why We Sell Our Straddles Before Earnings Risk Reward Or Probability Of Success? Whatever You Do, Don't Do This Before Apple's Earnings How NOT To Gamble On AAPL Earnings  
      Want to learn how to trade options in a less risky way?
       
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    • By Ophir Gottlieb
      Here it is -- a portfolio of FAANG stocks using pre-earnings trading. A 3:30 video that is staggering and includes some robustness testing.
       
      Reminder that you can sign up for Trade Machine as a Steady Options member here:
      https://cmlviz.com/register/cml-trademachine-49-mo-promotion-so/
       
       
       
       
    • By Ophir Gottlieb
      Trading options pre-earnings -- 1 minute 25 second video. (example: $AAPL)
      As a Steady Options member, you can get a promotional price, here:
      Try the Back-tester
       
       
       
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