AAPL Trade Idea

Oh, how I miss the expensive Apple (AAPL, $91.90, up $0.62) stock price before the split, let me name the ways: More premium for credit spreads, less commissions because I didn’t have to do as many contracts with a $500 stock price.

Any positive things about the split? Yes, liquidity, which was great before the split, should be better.  Why?  Option bid/ask spreads will be narrower and more folk will be trading options with these cheaper stock prices. Option Volatilities are a bit higher, maybe 15%, than before the split. At-the-money Implied volatilities are around 20 now and they were around 17 before the split. This is pretty normal when stocks get less expensive after a split, moderate increases in Implied Volatility usually result.

Range Bound Trade with great risk/reward? Iron Butterfly ( 2 Credit Spreads). AAPL price around $91.90

Using the July 3rd expiration (Thursday before July 4th trading holiday), Buy one 95 strike call and sell one 92 call. In the puts, buy one 89 put and sell one 92 put. Total Credit around $210. The total risk if AAPL goes to zero or up to a billion is $90. How did we get $90 Maximum loss? If AAPL goes to zero, I did a 3 point wide put credit spread that will max out at a $300 loss. Subtracting the credit of $210, that leaves us with a potential $90 loss. Great risk/reward to bring in a potential profit of $210 with risk of only $90.

I like Iron Butterflies for shorter term trades, (the July 3rd  expiration for this trade is about 16-17 days from expiration). Where would I worry a bit about this trade and either exit or adjust the trade? Near the expiration Breakeven points of roughly $90 on the downside and $94 on the upside. How much money would you probably put up at your broker for this trade? Depends on your broker, but the number should be around $90, the risk of the trade.

Should I try to make the entire Credit? No, that would require AAPL being exactly at short strike of $92 (short both the 92 strike call and put) in about 17 days, tough to hit the Bulls eye like that. I would shoot for maybe 25% of the credit or $50 per 1 Contract . That would give us about $50 profit on $90 of risk or capital if I did this 1 contract.

Work on the Craft and have a great day! Dan Sheridan dan@sheridanmentoring.com

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