Options Strategy (Archive)

  • Posted: 16 October 2011 11:20 PM #496

    lovemyipad - 17 October 2011 01:31 AM
    Gregg Thurman - 16 October 2011 05:44 AM

    I record the price of Spreads every 25? that AAPL moves.  I track 2 Spreads ITM and 2 OTM to get a range from about $12 ITM to $12 OTM Spread pricing.

    Its tedious but I’m learning a ton about the relationship between AAPL and Call Spreads that allows me to plan my purchases based on a true risk/reward basis.
    ...

    What’s been killing me since the Japanese earthquake is the macro events that drive AAPL down $15 to $25 on expiry.  The number of times this has occurred is the anomaly, not the fact that it does occur.

    Might you consider studying/tracking potential benefits of this same endeavor with expirations greater than one week?  Not holding to OE, but around the same duration as your weeklies.  I submit for your consideration that you may “win” less $, but more frequently, resulting in more $ over time.

    In the pipeline.

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    Posted: 17 October 2011 12:43 AM #497

    lovemyipad - 17 October 2011 01:17 AM

    I haven’t caught up on the latest posts in this thread, so apologies if you’ve already discussed this…

    Mav, you posted elsewhere (Weekend Updates?) about a bit of “buyer’s remorse” about the latest hedge.  I’m sure you can anticipate what I’m about to say: I was *most* impressed with the way you managed downside risk in a time of heightened uncertainty.  I was a little unclear on the underlying/expiration of your hedge, so I did want to suggest for consideration next time, to possibly reduce potential buyer’s remorse: hedge with SPY and/or go out further with the expiration.  Then, you can think, “I’ve got insurance through xx/xx/xx.”  Less antacids and more peace of mind, without feeling like you’re throwing $$ away.

    I dislike slow burns.  Antacids work best for acute issues, not chronic ones.

    I’m not sure I _liked_ what I was doing last week, iPad, but fundamentally it fits my trading style w/r/t to current market conditions.  IF AAPL was gonna sell off in this short window, I hypothesized, it would be that week.  When you play with “house money” (read: taxable gains), taking out what amounts to “short-term insurance” isn’t so bad.

    I think I know AAPL far better than the indices.  I’ll stick to what I know for now and continue learning and evolving my trading approach as time goes by.  Next on my reading list:  Condors and butterflies.

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    Posted: 17 October 2011 01:09 AM #498

    Mav - 16 October 2011 06:34 PM

    ... You will probably find that to beat theta and vega effects, you need a good deal of delta for those Oct 11s.  Of course being in-the-money really helps.

    Don’t forget about gamma.

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    Posted: 17 October 2011 01:11 AM #499

    That’s true, though I don’t think it’s a bad thing to leave gamma out or minimize its effects in your projections for conservatism purposes.

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
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    Posted: 17 October 2011 01:24 AM #500

    Mav - 17 October 2011 04:11 AM

    That’s true, though I don’t think it’s a bad thing to leave gamma out or minimize its effects in your projections for conservatism purposes.

    My apology, thot you’re talking about excessively risky bet :oops:.  In the mid 2000s when enature** are around, we discover that:

    It is possible to make 15-30* times return for very OTM calls per position.
    It is possible to make 100 times return over a couple of months if you’re lucky.

    Above is possible only when AAPL is in explosive mood.

    * Butterflies and condors can achieve that without AAPL in explosive mood.  I did that a couple of times this year but didn’t amount to much in absolute $ since the bet is very small.

    ** Just for info, enature was the first AFBer to think AAPL would hit $300 when AAPL was trading at $20-$30.

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    Posted: 17 October 2011 01:28 AM #501

    I was referring to the Oct $410 call position that StillLong has.

    I’m not sure what risky bet you’re referring to.  I might make one for earnings, but I have no idea what it’ll even BE yet.

    I’m trying to read up on condors and butterflies.  I do have a trading range theory for AAPL but first I have to understand the whole condor/butterfly deal, then I have to understand how to put one together in way that’ll pay off if my trading range theory is correct.

    [ Edited: 17 October 2011 01:30 AM by Mav ]

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
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    Posted: 17 October 2011 01:33 AM #502

    Mav - 17 October 2011 03:43 AM

    I dislike slow burns.  Antacids work best for acute issues, not chronic ones.

    I’m not sure I _liked_ what I was doing last week, iPad, but fundamentally it fits my trading style w/r/t to current market conditions.  IF AAPL was gonna sell off in this short window, I hypothesized, it would be that week.  When you play with “house money” (read: taxable gains), taking out what amounts to “short-term insurance” isn’t so bad.

    I think I know AAPL far better than the indices.  I’ll stick to what I know for now and continue learning and evolving my trading approach as time goes by.

    Mav, all of that makes perfect sense! smile

         
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    Posted: 17 October 2011 01:38 AM #503

    I thought so.  *folds arms, satisfied look*

    *realizes that’s a lot like Mr. Clean*

    [ Edited: 17 October 2011 05:19 AM by Mav ]

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    Posted: 17 October 2011 01:39 AM #504

    Mav - 17 October 2011 04:38 AM

    I thought so.  *folds arms, satisified look*

    *realizes that’s a lot like Mr. Clean*

    Only if you’re bald with an earring. wink

         
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    Posted: 17 October 2011 04:53 AM #505

    StillLong - 16 October 2011 06:06 PM

    I’ve left a SINGLE Oct-410 open and have a questions for the more experienced among us:

    What’s going to happen to its extrinsic value if aapl beats mightily on Tuesday?

    I bought the 410s when they were almost $20 OTM, so it was 2.35 extrinsic.

    Now they’re only a week from expiration and the extrinsic is closer to $6.  Is all that extrinsic value due to big expectations from earnings?  And will it disappear as soon as aapl opens on Wednesday morning?

    Thanks everyone.  Obviously one contract isn’t very interesting, but it’s something I’d be interested in for real plays down the line…

    Stilllong (is that really 3 L’s in a row? grin )
    The $6.20 of extrinsic value that your option still has is essentially all theta or time value, but it will be impacted greatly by the IV Crush (as it is called) once earnings are announced.  IV is very high now…sky high. It always is before earnings, due to the uncertainty.

    The Oct 410 Call has a vega of .1766 (expressed in cents).
    This means that for every 1% drop in IV, the 410 call will lose 17.66 cents.  A drop of 15-20% in IV is pretty common over earnings.  -20% IV drop x .1766 = -$3.52 - even if AAPL trades flat.  The drop in IV is like hitting a balloon with a pin.

    Note the IV just before the close on Tuesday, and then Wednesday morning.
    Take note of the extrinsic price and the vega of several different strikes, ITM and OTM.  You will see that they will be greatly impacted by the IV crush.

    You are somewhat protected in that the 410 call is ITM.  The IV crush will only affect the extrinsic portion of your option. The intrinsic value will always be the underlying price less your strike price. Vega has no effect on intrinsic value.

    Good Luck!

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    Posted: 17 October 2011 05:20 AM #506

    And theta decay will accelerate as the timer counts down to 0.

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    Posted: 17 October 2011 07:14 PM #507

    Gregg Thurman - 16 October 2011 06:02 AM

    I don’t believe that is so.  This earnings report should be a whopper, not just exceeding management’s guidance, but exceeding institutional investor estimates as well (I don’t mean WS analysts).  This will confirm to that group of investors that Apple has corrected the problems that caused the institutions to steer clear of AAPL since OCT earnings 2010.

    I think one of the reasons that institutions have steered clear is because of Jobs’ health.  Now that he is gone, I suspect that Mr. Cook is going to have to prove himself, even if some may feel he already has.

    I don’t think one blow out set of numbers will change sentiment and institutional investors are going to come rushing in.. 

    the way apple is priced, is the way they are priced.  They will never have the crazy multiples that some have.  The fact that Jobs’ is gone is just one more hurdle for them to jump over in time.  And that ‘jump’ is going to be in the form of prooving that they can keep coming up with new ‘stuff’.

         
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    Posted: 17 October 2011 07:16 PM #508

    I legged into JAN’12 350/360 bull put spreads today.

         
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    Posted: 17 October 2011 07:16 PM #509

    I do think great numbers and good guidance should keep AAPL over a P/E of 15 for a good period of time prior to earnings.

    iPhone 4S and iPad 2 will sell so mind-bogglingly well, Apple will begin to take on a Microsoft-like mantle of invincibility (in the good old days)

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
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    Posted: 17 October 2011 07:37 PM #510

    rudyo - 17 October 2011 07:53 AM
    StillLong - 16 October 2011 06:06 PM

    I’ve left a SINGLE Oct-410 open and have a questions for the more experienced among us:

    What’s going to happen to its extrinsic value if aapl beats mightily on Tuesday?

    I bought the 410s when they were almost $20 OTM, so it was 2.35 extrinsic.

    Now they’re only a week from expiration and the extrinsic is closer to $6.  Is all that extrinsic value due to big expectations from earnings?  And will it disappear as soon as aapl opens on Wednesday morning?

    Thanks everyone.  Obviously one contract isn’t very interesting, but it’s something I’d be interested in for real plays down the line…

    Stilllong (is that really 3 L’s in a row? grin )
    The $6.20 of extrinsic value that your option still has is essentially all theta or time value, but it will be impacted greatly by the IV Crush (as it is called) once earnings are announced.  IV is very high now…sky high. It always is before earnings, due to the uncertainty.

    The Oct 410 Call has a vega of .1766 (expressed in cents).
    This means that for every 1% drop in IV, the 410 call will lose 17.66 cents.  A drop of 15-20% in IV is pretty common over earnings.  -20% IV drop x .1766 = -$3.52 - even if AAPL trades flat.  The drop in IV is like hitting a balloon with a pin.

    Note the IV just before the close on Tuesday, and then Wednesday morning.
    Take note of the extrinsic price and the vega of several different strikes, ITM and OTM.  You will see that they will be greatly impacted by the IV crush.

    You are somewhat protected in that the 410 call is ITM.  The IV crush will only affect the extrinsic portion of your option. The intrinsic value will always be the underlying price less your strike price. Vega has no effect on intrinsic value.

    Good Luck!

    What source are you using for IV? And how pronounced is the crush on later-expiring options? Less the more distant the OE is, no?

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