Options Strategy (Archive)

  • Posted: 17 October 2011 07:45 PM #511

    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!

    Thanks Rudyo, everyone.

    I sold most of my Oct 410 position (opened at 2.31) last week and only kept a single contract open, partly so Blaze will watch it too.  As I’m new to options trading I guess I was a little surprised to see the extrinsic portion of the 410 grow as much as it did as
    a. expiration got much closer
    b. the strike went ITM.

    But the crush you describe makes perfect sense now, and by keeping this single contract open my hope is that the share price will gain enough Wednesday morning to make the intrinsic grow by more than the extrinsic shrinks.  It’s all infinitely interesting - to me.

    I’m also carrying Nov 385s that I got for 28.10 through earnings along with Jan 385s I got for 32.70.  It’s all out in the open now !  I felt much better on Friday than I do now, it feels like it’s going to be a close call with news that might come out of Europe on Wednesday. 

    Wondering if I should hedge with some SPY puts ala LoveMyiPad !!!

    Further disclosure - I’m long with @300 shares of aapl common since 2006, most of it acquired around 60.

         
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    Posted: 17 October 2011 10:31 PM #512

    StillLong - 17 October 2011 10:45 PM
    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!

    Thanks Rudyo, everyone.

    I sold most of my Oct 410 position (opened at 2.31) last week and only kept a single contract open, partly so Blaze will watch it too.  As I’m new to options trading I guess I was a little surprised to see the extrinsic portion of the 410 grow as much as it did as
    a. expiration got much closer
    b. the strike went ITM.

    But the crush you describe makes perfect sense now, and by keeping this single contract open my hope is that the share price will gain enough Wednesday morning to make the intrinsic grow by more than the extrinsic shrinks.  It’s all infinitely interesting - to me.

    I’m also carrying Nov 385s that I got for 28.10 through earnings along with Jan 385s I got for 32.70.  It’s all out in the open now !  I felt much better on Friday than I do now, it feels like it’s going to be a close call with news that might come out of Europe on Wednesday. 

    Wondering if I should hedge with some SPY puts ala LoveMyiPad !!!

    Further disclosure - I’m long with @300 shares of aapl common since 2006, most of it acquired around 60.

    if your only hedging an aapl position, I would seriously consider hedging only with aapl puts.  That way you get the raw, immediate and “un-filtered” protection.  I have done both (hedging aapl only with spy and aapl) and I think it only makes sense to use aapl for aapl.

    Now..  that being said, what Lovemyipad is doing with her spy puts is something different.  Those are trading vehicles to her as well as hedging positions.  I think they are more the former than the latter as well.  I agree and like what she does..  just make sure you understand what it is that she is doing and then make your decision based on that.

    I felt I was ‘wrong’ with using the SPY puts as hedges for aapl and I no longer do that.  What if something aapl specific happened?  and the rest of the market was ‘intact’?  Then, those spy puts wouldn’t hedge much at all.

         
  • Posted: 17 October 2011 11:11 PM #513

    blaze biscuits - 18 October 2011 01:31 AM
    StillLong - 17 October 2011 10:45 PM
    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!

    Thanks Rudyo, everyone.

    I sold most of my Oct 410 position (opened at 2.31) last week and only kept a single contract open, partly so Blaze will watch it too.  As I’m new to options trading I guess I was a little surprised to see the extrinsic portion of the 410 grow as much as it did as
    a. expiration got much closer
    b. the strike went ITM.

    But the crush you describe makes perfect sense now, and by keeping this single contract open my hope is that the share price will gain enough Wednesday morning to make the intrinsic grow by more than the extrinsic shrinks.  It’s all infinitely interesting - to me.

    I’m also carrying Nov 385s that I got for 28.10 through earnings along with Jan 385s I got for 32.70.  It’s all out in the open now !  I felt much better on Friday than I do now, it feels like it’s going to be a close call with news that might come out of Europe on Wednesday. 

    Wondering if I should hedge with some SPY puts ala LoveMyiPad !!!

    Further disclosure - I’m long with @300 shares of aapl common since 2006, most of it acquired around 60.

    if your only hedging an aapl position, I would seriously consider hedging only with aapl puts.  That way you get the raw, immediate and “un-filtered” protection.  I have done both (hedging aapl only with spy and aapl) and I think it only makes sense to use aapl for aapl.

    Now..  that being said, what Lovemyipad is doing with her spy puts is something different.  Those are trading vehicles to her as well as hedging positions.  I think they are more the former than the latter as well.  I agree and like what she does..  just make sure you understand what it is that she is doing and then make your decision based on that.

    I felt I was ‘wrong’ with using the SPY puts as hedges for aapl and I no longer do that.  What if something aapl specific happened?  and the rest of the market was ‘intact’?  Then, those spy puts wouldn’t hedge much at all.

    That makes a lot of sense.  I wasn’t too close to acting.  I’ve never followed indexes in any great detail.  I’ve started watching a little closer though.

         
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    Posted: 18 October 2011 12:02 AM #514

    Yep, blaze.

    I bought bear put spreads on GOOG on Friday but they had nothing to do with hedging against AAPL.  I ‘d hedge on the fly for a stock by buying puts as well, thiough of course I could do any number of things to manage risk.

    I’m pretty OK with where I have my AAPL trades now.  I can get mad at myself later if my bullish trade on the Oct 11 spreads backfires, but the new core trades have a good amount of time and leeway to be right based on a very conservative valuation model.  The holiday season is where the most fun is to be had, IMHO, so I’ll keep plenty of dry powder handy to buy dips, buy puts, or just stay on the sidelines sometimes.

    Signature

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

         
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    Posted: 21 October 2011 01:51 AM #515

    Max pain for this week is $390 as of tonight?s OI data. The highest put OI is the $390 strike. The highest call OI is the $420 strike.

    So if AAPL closes above $390, it may close near $420; if below $390, it may close near $390. Check back after the market close Friday.

    Max pain being below the high OI range has been very bullish, but not sure about when it’s borderline as it is now. Also, this is an abnormal week because of earnings.

    (“near” is vague—within one strike, perhaps?)

    Signature

    The only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. — Steve Jobs

         
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    Posted: 21 October 2011 11:34 PM #516

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

         
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    Posted: 21 October 2011 11:39 PM #517

    lovemyipad - 22 October 2011 02:34 AM

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

    That’s fabulous.  So, did you purchase the 350 long put first (how long have you had), then leg in with the short 370 put leg as AAPL’s price dropped and the 370’s value grew?

         
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    Posted: 21 October 2011 11:48 PM #518

    madmaxroi - 22 October 2011 02:39 AM
    lovemyipad - 22 October 2011 02:34 AM

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

    That’s fabulous.  So, did you purchase the 350 long put first (how long have you had), then leg in with the short 370 put leg as AAPL’s price dropped and the 370’s value grew?

    Precisely! smile  I bought the 350s on Tuesday around 7.50 - 8.50 (laptop is downstairs…I’m on iPad now).  I first legged in with with the 370s at 17 yesterday, then out today at 14-something, then in again at 17.25.  The lower we drop, the lower I will make the cost basis.

         
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    Posted: 21 October 2011 11:49 PM #519

    Unique - 22 October 2011 02:39 AM
    lovemyipad - 22 October 2011 02:34 AM

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

    What’s the max ROI?

    My great uncle’s name was Max.  ROI = return on investment.

         
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    Posted: 21 October 2011 11:50 PM #520

    Unique - 22 October 2011 02:39 AM
    lovemyipad - 22 October 2011 02:34 AM

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

    What’s the max ROI?

    At the moment, 100%

         
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    Posted: 21 October 2011 11:52 PM #521

    lovemyipad - 22 October 2011 02:48 AM
    madmaxroi - 22 October 2011 02:39 AM
    lovemyipad - 22 October 2011 02:34 AM

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

    That’s fabulous.  So, did you purchase the 350 long put first (how long have you had), then leg in with the short 370 put leg as AAPL’s price dropped and the 370’s value grew?

    Precisely! smile  I bought the 350s on Tuesday around 7.50 - 8.50 (laptop is downstairs…I’m on iPad now).  I first legged in with with the 370s at 17 yesterday, then out today at 14-something, then in again at 17.25.  The lower we drop, the lower I will make the cost basis.

    So the placeholder is the 350 long leg and you just alternate in and out on the short 370 leg as values permit?  At what point do you exit the 350 leg should we obtain an unexpected northbound train?

         
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    Posted: 21 October 2011 11:57 PM #522

    I won’t exit the 350 puts at all. I’ll keep the spreads intact at the lowest possible cost basis (highest possible credit).  If AAPL is over 370 at OE, the full credit is mine to keep.

         
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    Posted: 22 October 2011 12:00 AM #523

    madmaxroi - 22 October 2011 02:49 AM
    Unique - 22 October 2011 02:39 AM
    lovemyipad - 22 October 2011 02:34 AM

    I’ve been legging AAPL 350/370 bull put spreads for JAN’12 this week.  Cost basis (so far): 10 credit.  Beats wringing my hands and takes the edge off downwaves.

    What’s the max ROI?

    My great uncle’s name was Max.  ROI = return on investment.

    Love it! smile

         
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    Posted: 22 October 2011 12:12 AM #524

    lovemyipad - 22 October 2011 02:57 AM

    I won’t exit the 350 puts at all. I’ll keep the spreads intact at the lowest possible cost basis (highest possible credit).  If AAPL is over 370 at OE, the full credit is mine to keep.

    But it sounds like you have already exited the 370’s once.  If the market moved north fast while you were just long the 350 leg, what would you do?  Sell a short leg with a higher strike?

         
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    Posted: 22 October 2011 12:20 AM #525

    madmaxroi - 22 October 2011 03:12 AM
    lovemyipad - 22 October 2011 02:57 AM

    I won’t exit the 350 puts at all. I’ll keep the spreads intact at the lowest possible cost basis (highest possible credit).  If AAPL is over 370 at OE, the full credit is mine to keep.

    But it sounds like you have already exited the 370’s once.  If the market moved north fast while you were just long the 350 leg, what would you do?  Sell a short leg with a higher strike?

    Hmmmm…I would likely sell the 370s again and eat the loss, knowing I have until January to improve cost basis.  I would only unhedge for a day trade, and I do this slowly, not all contracts.  At this point, the credit is perfectly acceptable as is.