[quote author=“awcabot”] ... I have purchased LEAPS with the same dedication and carefulness of my regular stocks ... I started options trading in May. However so far things have gone fantastic for me. I bought $200 Jan09 for $3.78 and now they are at $36.50 ...

Hmm ... you got something for me to learn from.  Your call (LEAPS) purchase is perfectly timed.  Long period of consolidation ... IV completely crushed ... AAPL is about to rocket ... ideal time to buy calls (LEAPS).  If you can tell me more about this “dedication and carefulness” I would be most appreciated.

Mace, let me give credit where credit is due: my timing was lucky but it was my confidence in Apple’s fundamentals that has kept me from bolting through the August and November plunges.

After a year of trading AAPL with little to show but returns slightly higher than the S&P500;, I decided to turn to options trading. AAPL had been pretty much left at the Jan. ‘06 high of$ 86.40 (what a nightmare that number had become) even after the iPhone (radical) and BootCamp (really radical) announcements. Things were getting overdue for a big movement and the iPhone was just 7 weeks away.

After a small speculative placement in May, and a sense that after a year of stability that the stock was overdue for some big rise, I took the plunge. Shortly after I purchased my first just OtM 110, 115 and 120 Jan09 calls, things started moving quickly upwards so I took a gamble/speculative position/investment in $200Jan09 calls.

Note that I wouldn’t have taken these positions if I didn’t have rock solid confidence in the fundamentals and promise of Apple. I had been agonizing a year over a spreadsheet that includes most of Apple’s financial statements going back to 2001 and I had extrapolated growth to continue being great. I believed growth would continue: history had proven it and with the iPhone and Boot Camp coming up the dams of Cupertino were about to burst.

When I purchased the 200Jan09 LEAPS for $3.78 I considered $200 to be an achievable target. Heck, I argued, if it reaches $210 I will have almost tripled my investment in 18 months — screw S&P 500 returns of 13.6 of 2006. Now, end of November, if I say that AAPL will be at $210 in Jan09, I will be tarred and feathered a-la Wheeles for being too bearish.

My one bit of advice to option buyers is to open positions at a strike level that you believe is achievable, not some crazy OtM position that will rise or fall only because of IV. Today 1,331 contracts were exchanged for 230Dec07. That is unreasonable: folks we ain’t reachin’ 230 in three weeks, so don’t get an ulcer trying.

But then I am a 6 month old rookie. I was told by white haired investment professionals who made (and lost) lots of money that in the long term, options traders must hedge their bets.

[quote author=“awcabot”] ... My one bit of advice to option buyers is to open positions at a strike level that you believe is achievable, not some crazy OTM position that will rise or fall only because of IV. Today 1,331 contracts were exchanged for 230 Dec 07. That is unreasonable: folks we ain’t reachin’ 230 in three weeks, so don’t get an ulcer trying ...

Agree.  Doubt they would follow your advice though.

[quote author=“awacabot”] ... I was told by white haired investment professionals who made (and lost) lots of money that in the long term, options traders must hedge their bets.

I think they’re referring to near-term options not LEAPS.  IMHO:  All forms of trading should be hedged if there is no money management and your portfolio MUST be able to survive a Black Swan.  As I’m implementing a call replacement strategy, is silly to hedge calls (LEAPS).  Replacing each 100xcommon shares with a call (LEAPS) is hedging .

Mace,

I am following the Elliot thread, feeling like I’m reading Greek, but it has a science fiction fascination.  One thing I know is that stocks go up and down.  I have been lucky since getting into appl that it mostly goes up, but I am trying to limit my loss during the sell-offs.

When you say hedge a 100 shares with a call, could I humbly ask you to be more specific?
If appl is at 185, where might one LEAP?

This board is fantastic.  Thanks to all who post here.  lol

Call Replacement Strategy

[quote author=“dunedad”] ... When you say hedge a 100 shares with a call, could I humbly ask you to be more specific?
If appl is at 185, where might one LEAP?

Simply selling the stock and replace the stock position position with an equivalent call position, using some of the profit to pay for the call.  Since one call is equivalent to 100 shares.  Is a common risk reduction strategy.  I’ve employed it for my specific case:

Say, I’ve bought 1,000 shares of AAPL in 2003 for $7.  At today’s price, I’m feeling very good about it but can’t use any $ unless I sell them.  However, given Apple strong fundamentals, it could rise a lot higher.  Hence, I would miss out if I sell now.  This is where the call replacement strategy come in handy.

Sell 1,000 shares for $185, then buy 10 x calls (LEAPS 09) $180 @ $44 each call.  Now, I’ve 185-44=$141 gross proceeds to spend.  Max loss is limited to $44, gain remains unlimited like shares.  Pro is if I need only $100 to spend, I’ve $41 put in CD waiting for a nice opportunity to pick calls (LEAPS) cheap ... say it suddenly declines to $135 on Dec 11 because Fed says something that WS doesn’t like ... buy more calls (LEAPS).

Very clever!! idea   I knew you would have a different wrinkle. D

Do you use puts at all?

Re: Call Replacement Strategy

[quote author=“Mace”][quote author=“dunedad”] ... When you say hedge a 100 shares with a call, could I humbly ask you to be more specific?
If appl is at 185, where might one LEAP?

Simply selling the stock and replace the stock position position with an equivalent call position, using some of the profit to pay for the call.  Since one call is equivalent to 100 shares.  Is a common risk reduction strategy.  I’ve employed it for my specific case:

Say, I’ve bought 1,000 shares of AAPL in 2003 for $7.  At today’s price, I’m feeling very good about it but can’t use any $ unless I sell them.  However, given Apple strong fundamentals, it could rise a lot higher.  Hence, I would miss out if I sell now.  This is where the call replacement strategy come in handy.

Sell 1,000 shares for $185, then buy 10 x calls (LEAPS 09) $180 @ $44 each call.  Now, I’ve 185-44=$141 gross proceeds to spend.  Max loss is limited to $44, gain remains unlimited like shares.  Pro is if I need only $100 to spend, I’ve $41 put in CD waiting for a nice opportunity to pick calls (LEAPS) cheap ... say it suddenly declines to $135 on Dec 11 because Fed says something that WS doesn’t like ... buy more calls (LEAPS).

Well done Mace!!!  Excellent plan and execution.
FYI I unwound my Jan 08 spreads yesterday… bought the 140 calls and sold the 130’s whilst keeping the 110’s which I will exercise in Jan

Re: Call Replacement Strategy

[quote author=“SNIPUS”]Well done Mace!!!  Excellent plan and execution.
FYI I unwound my Jan 08 spreads yesterday… bought the 140 calls and sold the 130’s whilst keeping the 110’s which I will exercise in Jan

I’ve spent a few days now following (and even contributing to) AFB, and I’m already a huge fan.  The posters are uniformly informative and helpful.  Thanks to all of you!

I have made substantial profits buying AAPL leaps over the past three years, and holding them more than 12 months before selling.  From what I’ve read in your posts, it seems you do the same, and in fact we’ve made very similar LEAPS purchases over these years.

But you also invest in short term AAPL options, and I’m curious if you find that as profitable as AAPL LEAPs.  I have always assumed that option trading would generally be less profitable because (1) the random walks and manipulations of short term movements are hard if not impossible to predict, (2)  you pay more commissions with lots of short term trading, and (3) you have to pay ordinary income tax rates on short term gains.

Without needing to get into specifics, how do you compare your own experience of investing in short term AAPL options versus buying and holding AAPL LEAPS?

Re: Call Replacement Strategy

[quote author=“macorange”][quote author=“SNIPUS”]Well done Mace!!!  Excellent plan and execution.
FYI I unwound my Jan 08 spreads yesterday… bought the 140 calls and sold the 130’s whilst keeping the 110’s which I will exercise in Jan

I’ve spent a few days now following (and even contributing to) AFB, and I’m already a huge fan.  The posters are uniformly informative and helpful.  Thanks to all of you!

I have made substantial profits buying AAPL leaps over the past three years, and holding them more than 12 months before selling.  From what I’ve read in your posts, it seems you do the same, and in fact we’ve made very similar LEAPS purchases over these years.

But you also invest in short term AAPL options, and I’m curious if you find that as profitable as AAPL LEAPs.  I have always assumed that option trading would generally be less profitable because (1) the random walks and manipulations of short term movements are hard if not impossible to predict, (2)  you pay more commissions with lots of short term trading, and (3) you have to pay ordinary income tax rates on short term gains.

Without needing to get into specifics, how do you compare your own experience of investing in short term AAPL options versus buying and holding AAPL LEAPS?

LEAPS have been more profitable and 95 percent of my AAPL equity are in them. I do a little short term options because they are very liquid, narrow bid/offer pricing and because the press gets so many stories wrong that we get right (the latest being that China Mobile cancelled talks with Apple) that offers timely profits. Regarding my note to Mace above; the Jan 08 calls were leaps I bought over a year ago and held and were not short term. Hope that is what you wanted to know macorange

Re: Call Replacement Strategy

[quote author=“macorange”]
I’ve spent a few days now following (and even contributing to) AFB, and I’m already a huge fan.  The posters are uniformly informative and helpful.  Thanks to all of you!

Welcome to the best APPL Finance board on the Web!!!

[quote author=“macorange”]
I have made substantial profits buying AAPL leaps over the past three years, and holding them more than 12 months before selling.  From what I’ve read in your posts, it seems you do the same, and in fact we’ve made very similar LEAPS purchases over these years.

I have been buying LEEPS and doing swing trades on shorter term options. My strategy is to buy options that are at least 3 month in the future and sell when they are about 1 month out. If the profits are enough then exercise at least one contract and take the balance and reinvest in new short term options. When a new option chain appears then do it again.  Profits are in the 100 to 200% range. VERY acceptable!

Again welcome!

d

[quote author=“SNIPUS”]
The premiums on the otm leaps and out of the money calls are based on Momentum which was pretty good a couple of months ago. When AAPL regains its momentum the premiums will advance…. This is only an opinion of course but the premiums on a mo mo stock are pretty insane some times. Also I think there are a lot of Hedge and mutual funds selling into this. Keep in mind on Jan options we have about 3 dead weeks (Dec 15 to Jan 7) when the market is quiet so otm Jans are a risky prop as the time decay is exacerbated

I don’t disagree with any of this, but let me add a couple of thoughts.  IV is also influenced by the event factor.  For example earnings announcements, WWDC, MacWorld, the Euro introduction, etc.  So while the JAN IV is negatively affected by the quiet period around the holidays, it will be positively affected by the approach of the MacWorld keynote on Jan 15th.  I believe the JAN IVs will rise throughout December as talk about the keynote accelerates.

Excellent point capablanca and I fully agree. As a matter of fact, this expectation was my primary reason for buying Jan calls.

Newbie question.  Is there a dictionary of the widely used acronyms found in this discussion?  What is IV?  OTM and ITM I’ve figured out.
thanks,
Alan

[quote author=“alxyz”]Newbie question.  Is there a dictionary of the widely used acronyms found in this discussion?  What is IV?  OTM and ITM I’ve figured out.
thanks,
Alan

IV = Implied Volatility.  Very basically, how volatile the stock is, based on the pricing of options.

To learn more about options, investopedia is great, as is the education area of think or swim.

Re: Call Replacement Strategy

[quote author=“Mace”]I’ve employed it for my specific case:

Say, I’ve bought 1,000 shares of AAPL in 2003 for $7.  At today’s price, I’m feeling very good about it but can’t use any $ unless I sell them.  However, given Apple strong fundamentals, it could rise a lot higher.  Hence, I would miss out if I sell now.  This is where the call replacement strategy come in handy.

Sell 1,000 shares for $185, then buy 10 x calls (LEAPS 09) $180 @ $44 each call.  Now, I’ve 185-44=$141 gross proceeds to spend.  Max loss is limited to $44, gain remains unlimited like shares.  Pro is if I need only $100 to spend, I’ve $41 put in CD waiting for a nice opportunity to pick calls (LEAPS) cheap ... say it suddenly declines to $135 on Dec 11 because Fed says something that WS doesn’t like ... buy more calls (LEAPS).

There is one caveat to this strategy.  If something were to take Apple or the whole market down substantially next year, as in maybe Steve Jobs gets hit by a falling satellite next October, and Apple goes to $150 and stays there through January 09 you WILL lose the $44 per share and there isn’t much you can do about it.  Whereas, if you’d continued to hold the common stock you could ride it out.

That said, since Mace has described my position almost exactly, this is a tactic I’ve been seriously considering.  I will need to be making some serious strategic decisions this month in order to position myself for 2008.  Things to consider are Steve Jobs longevity in his position, The Apple Cycle (tm), iPhone market expansion, the shift to laptops, iPod sales sustainability, and Apple market share.  Some of these are positives, some are negatives, and some have a time decay associated with them similar to an options position.  I’m still pondering, but leaning towards at least a partial implementation of this LEAPS strategy.