Here is a conservative option strategy for those bullish on AAPL and wanting to play the recent price action.
Buy long dated deep in the money call ( e.g. oct $350) and sell an at or just out of the money call with same expiry (e.g. Oct $450) ... At Fri closing price, this would have cost you ~$6600 and if AAPL can get above $450 by Oct expiration, your positions would be worth $10K for a gain of ~$3400 or 50% .... Plus if you already own shares of AAPL, the money you collect from selling the $450 call (~$3400) can help be a hedge against any further short term fall in AAPL stock.
This trade won't lose money unless AAPL falls below $405 ... ($439 close price - $34 from sale of call = $405)
Help me out here, if you are bullish on Apple why would you want to cap your profits at the $450 price? Why not bump it up to $500? Cost would go up to $8300, but the potential gain of $15K would put the return close to 80%. In your example I believe you start losing money at $416 since the cost was 6600 and anything less that 416 would net you less than 6600 so 415 would be a $100 loss and so on. At 405 you could only sell the stock back for 5500, meaning a 1100 loss.
I like the concept, but I think the price drops further before it puts in a bottom. Second quarter is shaping up to be a mess with the first EPS decline in years. Absent some good news I could see that adding another small leg down and if guidance doesnt project to be much better than the second quarter I will be really curious to see how the market reacts to that.
I think the long call (350 price) continues to earn as the price of the stock price goes up.The short call ($450) caps the stock price for some small gain but provides more money toward reducing the cost of the long call. In other words, you could just buy the long call for $9500 but to offset some of the cost, you're capping your gain ON THE STOCK (not the long call) to obtain more funds to offset the price of the long call. Of course if the short call is managed, you can close the call out on a bottom and just keep the long call and later on put another long call against the stock near the high level then, say at a strike price of $500 when you can get a better premium..
I have a similar question though concerning why you just don't own the stock (which doesn't have a time expiration issue) and just let it appreciate as the stock price goes up and in addition, you get a dividend every 3 months with the stock. You can place a call against the stock out a few months and close it out when the stock price bottoms which it's likely to d a few times over the next few weeks.
Overall, I like the idea of a long call out a good distance to (1) give the strategy a chance to work and (2) reduce the amount of time decay. For the short calls, you could do shorter term calls that increase time decay and try to manage them (close them out as bottoms are encountered).
You are right about the point at which you start losing money ... I was thinking about it wrong. Thanks for highlighting!
On the question of which strike price ... No disagreement with the facts you point out, but the purpose of this post was to promote as conservative a strategy as possible ( which is achieved in this strategy by collecting as much time value as possible without compromising principal ... i. e. selling calls at or near the money ).
In my particular case, I already have a significant portion of my portfolio with exposure to AAPL with higher entry costs. I don't want to miss out on this price correction, but am nervous about how much more exposure I take on ... The call I am short gives some downside protection if prices continue to correct.
Thanks ... The only thing I am wrestling with ( which I guess everyone else is as well ) is whether AAPL has another leg down from here in the short term which would create a better entry point. Did one contract on Fri just so I don't miss the boat, but debating whether to do more ... Maybe will wait and see how Mon opens.
Looks like AAPL is oversold. But SPY looks overbought. My instincts tell me that there will be a leg down before things stabilize. SPY has to come back down from overbought condition first before an AAPL bottom can be trusted.
RSI is below 30, but recently, RSI have occasionally gone to mid-high teens. This could go further down first. Keep ur powder dry.
Good point, ypou could find yourself in the eye of a tsunami real quick..
Just as a reminder of how overbought some stocks are, take a look at Amzn and Sndk since mid-november...
I think Yen weakness is what's really driving the market, Check Fxy. It started to sell off as the #$%$ elections heated up and looked like Abe and his reflation platform were going to win. Markets front ran the Yen dump, still a good short until someone else, perhaps Europe, fires up their printers. Then a major Yen cover rally..
Very interesting idea but I'm very confused on the detail (probably my lack of knowledge of options). You can make $3400 with no risk by just selling the Oct 450 Call. It seems risky to spend $9500 on buying the call although it should pay off given the expectation that APPLE should be much higher by then. Why did you choose a 350 strike price for the long call? Is that a 'safe" low price? Basically this option strategy has the potential to make a lot more money than the $3400 if the stock price is at $500 or $600 in October right? The long call could go make a great deal money...
Just trying to clarify my understanding.
Selling a call without having an equivalent long is called being naked and extremely risky. If the stock were to spike, to $750 for example, you would have to buy at $750 and sell at $450 to fulfill the obligation on the call you sold.
The reason for choosing a deep in the money call is to minimize the time premium you pay. You could buy the equity itself and pay no time premium ... But if you want the leverage of options, then higher the strike you choose the more time premium you pay. Time remember is a wasting asset so as a rule of thumb, the less you pay for time the better.
With this strategy, your profit is capped at $450 ... Above that, any profit on the call you are long is offset by the call you are short.
I'd turn it into a diagonal, changing the strikes (sell higher OTM strikes) so you don't lose if the stock shoots up (very unlikely.) Sell the OTM calls every month & pay for the one you bought.
However, I wouldn't touch this stock until it finishes correcting. At the earliest, $420, but by $390 you might be a little safe unless next quarter shows more of the same, then $325-$350 is in sight.