What to do in AAPL??

The last 2 months in AAPL have brought about a 24% decline in the stock from $700 to $530 and a 60% increase in the implied volatility levels from 23 to 36. I forgot to mention the stock is still up about 30% for the year, not bad!

One more bit of information, January earnings will probably be the week of January 23rd, after January expiration (Friday January 18th). With that information on the table, here’s my 2 cents.

Trade Idea #1 : With AAPL near $530 initiate an AAPL January Bullish Butterfly

Buy 1 AAPL January $550 call

Sell 2 AAPL January $560 calls

Buy 1 AAPL January $570 call Total debit or cost $60 (excludes transaction costs)

Rationale: Historically Apple rallies into earnings, I will stick with that premise. And if the stock rallies, Implied Volatility levels should start to decrease. If I’m wrong, this is a very cheap spread to play an expensive and volatile stock. The directional butterfly is one of my favorite speculative strategies because it has great potential profits relative to the cost. In my opinion, much better than most option strategies.

How might I play this trade? This is about a 36 day trade and I would like to be out of this if possible in the next 18 days. Between $548 and $571 in 18 days this trade has the potential to be up approximately 50% without commissions included. Just a feel for how this trade works.


Trade idea #2: With AAPL near $530 look at an AAPL Put Credit Spread   


Sell 1 AAPL January 500 put

Buy 1 AAPL January 490 put $2.75 Credit

Rationale: Again, staying with the premise we will rally some into earnings and see implied volatility decrease, this spread will both benefit from a decrease in implied volatility and an increase in the stock price.

Risk management would be to close the trade if I made 90% of the credit of $275 (spread under ~$0.30). If AAPL were to decline, I would close the spread if the credit doubled, or went to between $5.50 and $6.00. Bottom line is I can’t be losing that much more than I’m making. I certainly have the probabilities in my favor, but still have to devise a plan if I’m wrong. There are adjustments I can do if the stock falls, for time purposes today, I will offer a simple risk management option of merely closing the trade.

Why are the probabilities good with this trade? With the stock around $530, the January 500 put I’m selling has a delta of 29. That means there is close to only a 20% chance AAPL will close under that strike in the next 37 days. It obviously could happen, and that is why we have a risk management plan.

Dan Sheridan


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Dan Sheridan


Dan Sheridan is a 22-year CBOE veteran who worked with the highly successful specialist firm Mercury trading, which was headed up by Jon and Pete Najarian. While at Mercury Trading, Dan was responsible for training most of the traders including Pete Najarian, one of the current hosts of CNBC's Fast Money. Dan has been teaching…