AAPL Options Analysis and Review: A Post-Mortem

AAPL Options AnalysisBy Jeff Wilson
If you had the chance to read my pre earnings article summing up Apple (AAPL) options trading ideas (from both sides), here is a follow up AAPL options analysis and review. In this piece, I’ll show how each trade is looking as of the 1/24/12 closing price: $450.50. Now, it’s obvious that those playing for the upside will be in losing positions, so trade management will be key. Congrats to those playing for more downside.

Note that each AAPL options analysis (and review) is italicized under the varying trade ideas. And prices and gains/losses on options are based on the mid price between bid/ask.

AAPL Options Analysis and Trading Reviews

Playing for the upside

I. Proactive investment type of position:

a) In a long stock position of at least 100 shares initiated within the past 7 trading days with an avg. cost of $500 and looking for a 25% (excl. dividends) return

-Sell to open Jan ‘14 $570 call(s) for about $31.60.  You can get called away at $570 regardless how much higher than $570 the stock is trading at. However, you took in $31.60 in premium so $570+$31.60 = $601.60 is the actual value you sold your shares for which achieves your investment objective (20.32% return excl. commissions). This premium also provides a cushion worth the same amount to the downside which is $468.40 ($500-$31.60). One can choose where to put a stop loss on the stock depending on risk tolerance.  Weekly and monthly charts provide some insight on some important levels.

AAPL Options Analysis / Review

– Stock Position: – $49.50

  Sold Call: + $18.70.  

You are still in a net losing position(about $30.80) though and still have some premium left on the sold call.  Depending on your risk profile, you could be out of this trade and take the loss.  If you prefer to hold on but be more proactive in managing the trade, you can wait to see if the stock starts to consolidate show signs of holding this $450 level.  If it does, you can look to buy back the sold call then based on what you use for retracement levels wait for the push then sell a lower strike call which is nearer term and work out the averaging down that way.

b) In a long stock position of at least 100 shares initiated within the past 7 trading days with an avg. cost of $500 and looking for a 15% return (excl. dividends) return but want outright protection to the downside below $475 on any earnings miss. However if stock trades at $430-$400 level, would consider buying down there again

– Go long Feb 1 weekly $475/$430 put vertical for $6.90 or better.  Short April $575 call for $9.65 or better.  You take in a total premium of $2.75. In this scenario, you can get called away at $575 by April for a 15.5% return ($575 + $2.75 of premium taken in).  Take note that the insurance in the form of the put spread only covers you until Feb. 1. Hopefully, you’ll have enough time after they report to do your homework and assess the price action and stock fundamentals

 AAPL Options Analysis / Review

– Stock Position: – $49.50

  Sold call: + $8.30

 If you hold this position through next week AND stock closes between $475 and $430 on Feb. 1, the long $475 put will exercise and you basically surrender your 100 shares at $475.  If this is how plan to manage your trade, take note that unless you want to be short a naked call, you should also look to buy back the sold call.  As an alternative should AAPL retrace the drop to around the $480 level by next week, you can look to roll the April $575 to next week’s $490 call strike. In either case, take note that your put spread only protects your position to a drop to $430.

II. Swing trader. Bought stock at about $490 AH upon hearing of Tom’s Demark call on CNBC where he said it can go 20% higher from where it was trading at that time (roughly $485). I think it can go up after earnings but hesitant to stay in the long position and put protection seems too expensive.  Don’t mind getting back in at $450 if it gets there

a) Sell stock at $507.77 (using AH pricing) and book the $17.77/share profit.  Go long April $550/$600 call vertical and short the April 450 put for a net credit of about $3.25. The call vertical give you upside exposure should Tom Demark’s +20% move happens within 80 days or so.  The short put allows you to finance the cost of that call vertical at a strike that you are willing to go long shares at.  You take in $3.25 in credit for your time as well.

AAPL Options Analysis / Review

– Barring one heck of a bounce, the call vertical will be worth a tiny fraction of what you bought it for.  The April $450 put you sold is worth about $25.35.  But trade thesis is that you don’t mind getting long at $450. If that thesis has changed, you can either close it out incurring a loss of ($17.77 + $3.25 + $1.50 – $25.35; locking in profit on stock, net credit at opening of position, premium left on the call spread, and cost to close the short put) of $2.83 which isn’t too bad considering the drop in stock.  If you think that AAPL can hold this $450 level for a several weeks and wait for a bounce, you can look to buy the put back for cheaper than its current price.  In addition, if you’d rather buy the stock lower, you can look to roll(b) the short put out to a lower strike at a later month. For example, you can roll the April 450 put to the May 440 put for a slight credit (roughly .60). What this does is a) buys you more time and b) doesn’t obligate you to buy AAPL stock unless it closes below $440 on May OpEx which is a full $10 below what you are currently obligated to buy it for.

b) Sell stock at $507.77 (using AH pricing) and book the $17.77/share profit. Go long March $525/$555 call vertical and short the March $450 put for a total cost of about .10.  Similar concept to a) with differences being in the price $AAPL needs to trade at before position starts to be profitable and time for the thesis to occur.

– Similar comments to a)

III. Straight up long. Willing to risk all that I put in.  

AAPL Options Analysis / Review

– For both scenarios, barring a big bounce this week or even next week, these call spreads will be worth a tiny fraction of what you had bought them for and essentially worthless. 

a) With the IV inflated due to the earnings event, one of the better ways to reduce the risks of buying inflated premium is by selling another highly inflated options contract.  Thus, buying a call vertical helps mitigate having to just buy juiced up contracts. Right now the options market is pricing in a $35 move which is roughly a 7% move in either direction.  This week’s $525/$540 call vertical can be bought for $4.35.  This provides a better than 1:3 risk to reward if $AAPL closes Friday over $540.  With this strategy, you are playing the earnings and reaction to it  up to 2 trading days after.

b) Long Feb 1 $540/$555 call vertical for about $3.10.  This is a play for $AAPL to move up into 2013 highs.


Playing for the downside

I. Mildly bearish: If reaction to earnings is negative, expecting at least $480 this week (as highlighted on weekly and monthly charts)

a) Long this week’s $490/$480 vertical put spread for about $3.70.

AAPL Options Analysis / Review

– Unless it bounces and closes at or above $486.30 this Friday, this will be profitable. Could look to liquidate position before close on Friday if the stock shows signs of bouncing. Also, depending on your broker, you might want to close it out. Some brokers charge a hefty fee for option exercising and assignment. So cost of commission and slippage might still give you a better return than having you leave the position on for the full $10.00

b) More complex structure: As mentioned above, market is pricing in a $35 move. Assuming stock is trading at roughly $505, downside expectation is $470.  Long $485/$470/$455 put butterfly for about $2. Good risk to reward but do know that butterflies are low probability trades.  For more info on this structure, click here https://www.theoptionsguide.com/long-put-butterfly.aspx

AAPL Options Analysis / Review

– While this will be profitable at current levels, to get full profit potential, AAPL needs to pin at $470 on Friday. With the stock trading below $455, this will be a losing position. Please refer to note above on broker and exercise fees.

II. More bearish: If reaction to earnings is negative, not only will it be trading around $480 this week, will also be expecting it to trade in that $480-$430 range and high probability that it trades to $450 by next week(as highlighted on weekly and monthly charts)

a) Long Feb 1 $475/$450 put vertical for about $5.05.

AAPL Options Analysis / Review

– This is worth about $17 and  will be profitable unless there a big retracement back up. Max worth of the spread is $25. It’s trading at 68% of that. One should take profits on some should they have multiple positions.  If you want to get cute about this structure, there are a a few ways to lock in some profit while continuing to hold on to a bearish to sideways thesis on the action.  

III. Uber Bearish

a) I.a) or I.b) under this downside section combined with a short call vertical. Choose 2 strikes over the implied move PLUS current stock price as the short strike. Assuming AAPL trades at this $505 level and implied move is $35, shorting this week’s $550/$560 call vertical for a $1 credit would be the supplement to the vertical or butterfly put spread.  The risk profile changes though.  While the $1 credit reduces the outlay for the vertical or butterfly spread, there is an additional risk taken on in the form of being short the $10 wide spread.  Should $AAPL pop and makes a move into that $550-$560 range before close this Friday, that sold spread for a credit will begin to lose money.

AAPL Options Analysis / Review

– Sold Call Spread: +$1.00

Again, barring any miraculous bounce, those sold call vertical will expire worthless. Add this to any gain from I.a) or I.b)



I. Can’t really pick a direction but I expect the levels to be respected on both sides.  Will look at the upside and downside levels and combine them with implied move to choose strikes.  

a) With stock trading at $505 and implied move at $35, expecting $470 and $540 as extremes. Allowing for a little wiggle room and using levels on chart as a guide, going short this week’s $545/$550 call vertical and the $465/$460 put vertical for a net credit of about $1.45.  This provides a 29% return on risk ($5) should $AAPL trade within the $465-$545 range.

AAPL Options Analysis / Review

– Sold call spread will expire worthless. Need to manage the short $465/$460 put spread which is currently in the maximum losing position. With the $5 maximum worth of the spread and the $1.45 you took in on the credit, you are looking at a $3.55 net loss per spread.

b) Let’s assume that you think that the options market if overestimating the post earning move. Instead of the implied move of $35, you think it moves only $15.  With this in mind, selling this week’s $525/$530 call vertical and the $490/$485 put vertical for a $3.35 credit.

AAPL Options Analysis / Review

–  The $525/$530 should expire worthless.  Between the $5 spread and the $3.35 you took in on the credit, you are set to be in a $1.65 loss per spread.

Up or Down, I don’t care. Just want to take advantage of the volatility skew

When there is a binary event such as earnings report, front dated options gets inflated relative to back month dated contracts.  This is reflected in the Implied volatility(IV) readings on the contracts. At the moment, this week’s at the money strikes on AAPL has an IV of about 83% whereas next week’s have an IV of about 57.5%.  Without talking too much about the technicality of IV, what this means is that while AAPL options are being marked due to an event, this week’s options are being marked up so much more.  Let’s take the $505 call for example. This week’s contracts are being priced at $17.40. With 3 trading days into expiration, it’s basically being priced at about $5.80 per day ($17.40 divided by 3).  Next week’s $505 calls are going for about $19.80.  With 8 trading days until next week’s expiration, those contracts those contracts are being priced at about $2.48 per day.  You can see how inflated IV changes the premium picture.

One can pick a direction and take advantage of such volatility skews.  One way of doing this is through calendar spreads. Let’s work again with the $35 implied move and have as the trade thesis that it will not be violated. Just in case, the structure will again allow for some breathing room for the structure.

a) Call side (Long bias): Short this week’s $545 call, long next week’s $545 call for about $2.25.  The idea here is for $AAPL to move up but not too high where it trades above $545. The best case scenario is for $AAPL to get to $545 but expires right below it on Friday. The call you sold for this week will expire worthless whereas the long call you own for next week have so much premium left. There risk here is twofold: 1) that it overshoots the strike price during the week that the front dated contract expires on and 2) it moves down a lot that any premium left on the back dated contract becomes worthless

AAPL Options Analysis / Review

– Can look to sell this to recoup a tiny fraction of the premium bought. It’s currently at $0.16

b) Put side (Short bias): Short this week’s $465 put, long next week’s $465 put for about $2.25. Similar concept to a) above.

AAPL Options Analysis / Review

– Will need to manage this position. A weekly close of $465 will make this week’s put worthless while still being long next week’s $465 put.  However, with AAPL trading below $465, the short put for this week will be exercised and you will end up being long AAPL shares with entry cost of $465.  This spread can be sold for about $3.25. So you can sell for a profit.  However, you can see if it bounces towards $465 which will benefit your position.

c) One can play the volatility crush on both sides using both calls and puts.  This structure is known as the double calendar spread. One would want a move within the parameters set by the short strike to occur. It doesn’t matter whether it’s to the upside or downside as long as a move close to the implied move occurs.

AAPL Options Analysis / Review

– Will depend on which strikes were chosen.  

I hope most folks were able to manage their positions well. As traders, we can’t always be in profitable positions. Executing trades based on thesis is step 1. Trade management is part 2. 


Twitter:  @cerebraltrades and @seeitmarket

No position in any of the securities mentioned at the time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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