(DISCUSSION) AAPL August 2013 trade

[Kim]

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.

 

[Dawajmeister]

I'm in on the calendar at 5.45, I felt comfortable going ahead and getting in because I've been tracking AAPL for a while.

[srf335]

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.

[Kim]

Yep - this is why I don't short June - the IV of June options might start increasing as we get closer to the conference.

[Ice101781]

forget it, answered my own question --- just realized the trade is vega positive. 

 

confusing the calendar with a short straddle/strangle ---

[Kim]

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.

[Kim]

I'm in at 5.50.

[1440]

What's your roi target on this since it is a calendar?

[Marco]

What's your roi target on this since it is a calendar?

1st post

 

"The time frame for this trade is around 2-4 weeks and the profit target is 20-30%"

[Kim]

If you are still not in this trade, the mid is 5.40 now.

[1440]

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. 

[Kim]

My profit target is 20-30%. I intend to be in the trade for at least another couple weeks - unless the profit target is reached before. And yes, on a down day the IV tends to spike.

[1440]

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%? 

[Kim]

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.

[Maxtodorov]

I got greedy and closed today at 6.10.

[Mikael]

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.

[Kim]

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.

[Hannes Kury]

Kim

 

Stock is down 20 points from where we entered, VXAPL is down too from where we entered, theta is not very high. Where do the gains come from?

[Kim]

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.

[Ice101781]

with AAPL down ~$430, one of our break-even points at expiry, what's our play with this calendar?

[naterman]

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?

[Kim]

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.

[Kim]

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.

[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.

[Kim]

You can check IV in TOS for example.

Previous cycles:

May options at April 10: 35% IV

Feb options at January 10: 38% IV

[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. 

[Marco]

I feel like I should have adjusted that by now, but somehow missed it and now hoping for a bounce...

[Ice101781]

Kim, this trade is currently down over 25%. What type of stop-loss do you have in mind?

[Kim]

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.

[Marco]

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 

well fingers crossed ....

[Kim]

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.

[oliver8455]

I am receiving the following error message from TOS:  "Calendar may not use undefined instrument" Could someone please tell me what I'm doing wrong?

[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?

[Kim]

Watch the price action for a while. I think the 410 is still a good choice or you can go slightly lower if you think that AAPL goes lower.

[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.

[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.

[Kim]

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.

[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?

[Hannes Kury]

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?

[Kim]

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.

[Kim]

We want the stock to be as close to 410 as possible. We will be out the adjustment calendar on or before this Friday and will be looking to move it to the next week.

[Ice101781]

Okay, that's what I figured, but I just wanted to confirm. Thanks. 

[lc_match-aka-Bill]

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? 

[Kim]

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%.

[Hannes Kury]

 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?

[lc_match-aka-Bill]

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.

[PaulCao]

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 June 25, 2013 by PaulCao

[PaulCao]

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 June 25, 2013 by PaulCao

[Ice101781]

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

[Maxtodorov]

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....