(Editors note: Fari sent us the AAPL trade info this morning. The charts are from yesterday).
As you all know, Apple (AAPL) price action has shown resilient behavior in comparison to the market behavior as of late. Since their Q2 EPS announcement, the stock is up over 11.5%. After a 29 week basing formation, the stock finally broke out. The W formation of the chart pattern is considered to be very bullish. Last weekend, the company announced that the new iPhone will be launched on September 10, 2013.
The upper boundary of the basing formation in AAPL has been around 470. Today (Tuesday), we finally broke out above that level with a surge in volume in both options and stock. Below you can see the huge spike in volume in AAPL August Calls. Even though these calls expire this week, the amount exceeded the open interest in most of the OTM strikes.
The spike in volume today, was a great “tell” that an explosive price action was about to occur. No one knew that AAPL was about to move over $15 intra-day due to the Carl Icahn’s announcement that he has taken a large position in the stock.
With the new iPhone coming out next month, and additional new products in the company’s pipeline, NOW is the time to own AAPL stock. The breakout in the chart pattern further confirms our thesis.
After witnessing the volume surge in AAPL in the past couple of trading sessions, initiating a long entry looked very promising. For us, the best way to play this was via options. We wanted to capture the potential move higher with limited downside risk. As you all might be aware, AAPL calls are usually expensive due to its high implied volatilities and its stock price. We wanted to commit limited capital to our trade without capping and profit potential.
We decided to purchase a couple of 485 Aug-23 calls expiring next week for about $3.20. Our plan was to capture some profit on those calls and then sell the 490 for over $3.20 in order to create a $5 call vertical with zero risk on the trade. This means our max profit would be $5 ($5 X 100 = $500 per call) with no risk of losing money.
Although that sounded too good to be true, but that was the plan.
After 30 minutes into the trade, AAPL moved from $475 to $485 within minutes. This changed our OTM calls to ITM and the $3.20 premium we paid went to $9.20 (that by itself was a 288% profit. Since we believe AAPL is a great stock and has further upside potential, we decided not to exit out of the entire trade. We had to book some profits after such a huge and impressive move. We decided to close 50% of our position. For our remaining 50%, we sold the 490 Aug-23 Calls for $7.00. So now we have a $5 call vertical with a cost basis of ($3.80) which means our worst case scenario (if AAPL closes next Friday below $485) we will make $3.80 on our remaining 50% and 119% profit from the initial investment. For our best-case scenario, AAPL needs to close above $490 by next Friday in order for this vertical to be worth $5, which means, we will make $3.80 + $5.00 = $8.80 a 275% profit.
For us option traders, today’s price action in AAPL could provide a myriad of opportunities. We remain bullish on AAPL and will continue to trade it accordingly. Given the recent moves, we can actually create even more trades in AAPL using both calls and puts in order to play the upside bias we currently have.
Our target on AAPL for the next 2 weeks is $504. Once our initial target is met, our next target is $520 which could be reached prior to the launch of the new iPhone. Hopefully, this can give you a better understanding as to what we are looking at right now.