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Wednesday, January 19, 2011

Playing AAPL Earnings with options - Trade Closed

Steve Jobs taking a vacation due to health problems is not fresh news anymore, AAPL earnings are behind and part of history,....with all the ghosts gone, the inevitable happened, options volatility in February just crashed, and with it, January expiration options went down substantially, which is great because we were shorting a couple of them, the 335 PUT and the 350 CALL. This is a follow up to the trade started here yesterday.

Take a look at the volatility values at market close for AAPL and compare January volatility today with that of the article yesterday:

Click on image to enlarge

January volatility went down from 50 something to 32 today, down by near 20%!! Ain't that lovely?

So, today I started the day entering two independent orders to close the initial double calendar position by parts. My initial Double Calendar was formed by two Calendars one using the 335 PUT options, shorting January and long February, and the other Calendar using the 350 CALLs, again shorting January and long February. You can enter two independent limit orders at your desired price, and if the combo of options reaches the value you specified then it will be filled. By doing this you dont have to be looking at the markets all the time and still exit your position automatically and with a profit. That's what "lazy trading" is all about!!!

If you still don't get it that's fine, I'll make it easier illustrating with the numbers.
Yesterday's position was filled as follows:

SOLD 1 AAPL JAN 335 PUT @4.60 (+$460)
BOUGHT 1 AAPL FEB 335 PUT @9.90 (-$990)
SOLD 1 AAPL JAN 350 CALL @4.30 (+$430)
BOUGHT 1 AAPL FEB 350 CALL @9.70 (-$970)

The total debit invested was $1070. Now if you detail the position the first 2 options along form a simple Calendar spread, and the the last 2 options are forming another Calendar. The First Calendar cost 530 dollars (990 - 460). I said to my self "Ok if I can get rid of this calendar at $600, I am happy, that would be a 70 a dollar profit on a 530 investment". So I went to my platform and entered a limit order to close that Calendar buy buying the JAN 335 PUT and selling the FEB 335 CALL all for $600 and good till cancelled. That is, the pending order will be there indefinitely until the market hits that price or the trader manually cancels it. Similarly, I thought that if I could sell the Calendar formed with the CALLs for $590 I would be more than happy, making a $50 profit on a 540 dollar investment (970 - 430). So, that's how I played it, entering these two separate pending orders. My goal was to make $120 by making $70 in one Calendar and $50 in the other. $120 on a $1070 investment represents an 11% ROI in less than a day anyways.

The close of the Calendar made up of CALLs was filled at a very good price $735, way over the $600 that would have made me happy. Then with this small victory I just became anxious, and my cowardice betrayed me again, I just wanted out and seeing that my PUTS Calendar close didn't get filled I just sold it manually at the market price of the moment for $541. So in total both Calendars were sold for $1276. Having invested $1070 buying them the day before. That represents a $206 profit, or 206*100/1070 = 19.25% return on investment. Not bad for a less than 24 hour play. Commissions by the way $11.80 to open the Double calendar, then 5.80 to close the CALLS calendar and 5.80 to close the PUTS Calendar, for a total of $23.60 in commissions. Commissions are a bitch...I know.

Now had I just been a little more patient with my PUTS Calendar, let's see what would have happened.

JAN 335 PUT closed the day at 5.35 ($535)
FEB 335 PUT closed the day at 12.60 ($1260)

This means I could have closed this calendar for $725 instead of the $541 I got. In total I would have closed the whole position for 725 + 735 = $1460, for a $390 profit on a $1070 investment (36.45%). Damn,.......!!! LESSON LEARNED, patient!!! Odds were totally on your side. Well but still a win is a win, plus a lesson learned for a career not bad at all.

That's all folks, hope you enjoyed the idea! By the way Google is reporting earnings tomorrow after market close, take a look at the at the money Straddle before market close and remember the last straddle played on GOOG, learn from it!! it's for free!!

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