AAPL Options Strategy

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    Posted: 22 August 2012 07:30 PM #736

    nkmho - 22 August 2012 10:16 PM

    With BCSs, you are writing options against your long options. For instance, if you open a 650/675 BCS (BTO 650, STO 675), and someone exercises the 675 call, you are covered by your 650 call, which you could exercise and you’d obtain the full $25 value for your spread.

    Ah! Makes sense. Cool. Thank you!

    Second question. If you were feeling quite confident in a rising share price, bought the long leg, waited until the short leg went up in value and then wrote the short leg, you could potentially have a situation where you’ve acquired your spread for much less or even a gain. Is this the case? And really the only issue (aside from the ever-present risk) would be the fact that you’d have to foot the bill for the whole call purchase in the intervening timeframe. Is this a common strategy?

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    Posted: 22 August 2012 11:12 PM #737

    cambrose - 22 August 2012 10:30 PM
    nkmho - 22 August 2012 10:16 PM

    With BCSs, you are writing options against your long options. For instance, if you open a 650/675 BCS (BTO 650, STO 675), and someone exercises the 675 call, you are covered by your 650 call, which you could exercise and you’d obtain the full $25 value for your spread.

    Ah! Makes sense. Cool. Thank you!

    Second question. If you were feeling quite confident in a rising share price, bought the long leg, waited until the short leg went up in value and then wrote the short leg, you could potentially have a situation where you’ve acquired your spread for much less or even a gain. Is this the case? And really the only issue (aside from the ever-present risk) would be the fact that you’d have to foot the bill for the whole call purchase in the intervening timeframe. Is this a common strategy?

    Yeah, that would be called “legging in”. I’ve done it quite a bit, as well as some others here, especially lovemyipad. You can also leg out of a spread as well, with the similar need for capital to cover the long call.

         
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    Posted: 23 August 2012 12:13 AM #738

    nkmho - 23 August 2012 02:12 AM

    Yeah, that would be called “legging in”. I’ve done it quite a bit, as well as some others here, especially lovemyipad. You can also leg out of a spread as well, with the similar need for capital to cover the long call.

    I’m assuming you would always have to close the short leg first as to not leave your written options naked.

    So am I right in understanding that you can own a BCS essentially for free and there is really no risk at that point since if both strikes expire OTM, you are out nothing.

    I know this is old hat for many here, but this is really interesting.

    Final question(s). I apologize for all the beginner questions. I have read a lot online, but they don’t really spell out the fine and potentially frightening details.

    If you take a BCS to expiration and both strikes end ITM, the long call will be automatically exercised and I’m assuming the written call will be assigned. Do these automatically take care of each other or do you have to perform some other action. Does it matter how large the stock sale is? If you have 100 contracts, do you have to worry that the whole stock transaction will be $6.5M? Also, what happens if you’re assigned early? Does the long call automatically sell? I guess my question is, do you always have to keep an eye on this or can you go away for a bit and everything will take care of itself?

    Thanks again for all your help.

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    Posted: 23 August 2012 01:55 AM #739

    cambrose - 23 August 2012 03:13 AM

    I’m assuming you would always have to close the short leg first as to not leave your written options naked.

    Well, it’s possible close the long leg first, but you’d need a ton of margin to cover those naked options, so for practical purposes, you’re right in saying that you’d close the short leg first.

    So am I right in understanding that you can own a BCS essentially for free and there is really no risk at that point since if both strikes expire OTM, you are out nothing.

    I know this is old hat for many here, but this is really interesting.

    Final question(s). I apologize for all the beginner questions. I have read a lot online, but they don’t really spell out the fine and potentially frightening details.

    If you take a BCS to expiration and both strikes end ITM, the long call will be automatically exercised and I’m assuming the written call will be assigned. Do these automatically take care of each other or do you have to perform some other action. Does it matter how large the stock sale is? If you have 100 contracts, do you have to worry that the whole stock transaction will be $6.5M? Also, what happens if you’re assigned early? Does the long call automatically sell? I guess my question is, do you always have to keep an eye on this or can you go away for a bit and everything will take care of itself?

    Thanks again for all your help.

    It’s best to read up on what actions your broker will take regarding a spread expiring ITM. With my broker, the long call is automatically exercised if it’s at least $0.01 ITM, and the short call is assigned if whoever holds the long call at the other end exercises it (i.e. they did not sumbit a “Do Not Exercise” notice beforehand). This takes place w/o my involvement, but do note that the broker will charge an exercise/assignment fee per leg. I think I usually see the difference between the 2 strikes get credited to my account on Sunday. You don’t have to have whole stock price amount to let the transaction between.

    As for early assignment, this is actually the best scenario that can happen, as you’ll get your max P/L if you exercise your long call. I haven’t had this happen to me, but what I’ve seen with other people’s experiences, seems like you have to manually exercise the long call. Once again, you should check with your broker regarding this as well.

    Don’t worry about asking all these questions. They are really good ones that someone getting into options and spreads should be asking. We’re all here to help each other out.

         
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    Posted: 23 August 2012 02:23 AM #740

    nkmho - 23 August 2012 04:55 AM

    It’s best to read up on what actions your broker will take regarding a spread expiring ITM. With my broker, the long call is automatically exercised if it’s at least $0.01 ITM, and the short call is assigned if whoever holds the long call at the other end exercises it (i.e. they did not sumbit a “Do Not Exercise” notice beforehand). This takes place w/o my involvement, but do note that the broker will charge an exercise/assignment fee per leg. I think I usually see the difference between the 2 strikes get credited to my account on Sunday. You don’t have to have whole stock price amount to let the transaction between.

    As for early assignment, this is actually the best scenario that can happen, as you’ll get your max P/L if you exercise your long call. I haven’t had this happen to me, but what I’ve seen with other people’s experiences, seems like you have to manually exercise the long call. Once again, you should check with your broker regarding this as well.

    Don’t worry about asking all these questions. They are really good ones that someone getting into options and spreads should be asking. We’re all here to help each other out.

    Thank you for all your assistance. It’s really helpful. Going to start playing around with single contracts until I feel I’ve got it under my belt.

    When AAPL is rallying like it is currently, it seems like it wouldn’t be all that hard to set up reasonably safe ITM “net zero” $10-$15 spreads. Set one up and then move onto another and just wait until expiration for the cash to come in. If I get caught in a downturn, at least I’m holding an option I’m comfortable with. Seems simple enough…

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    Posted: 23 August 2012 03:32 AM #741

    cambrose - 23 August 2012 05:23 AM
    nkmho - 23 August 2012 04:55 AM

    It’s best to read up on what actions your broker will take regarding a spread expiring ITM. With my broker, the long call is automatically exercised if it’s at least $0.01 ITM, and the short call is assigned if whoever holds the long call at the other end exercises it (i.e. they did not sumbit a “Do Not Exercise” notice beforehand). This takes place w/o my involvement, but do note that the broker will charge an exercise/assignment fee per leg. I think I usually see the difference between the 2 strikes get credited to my account on Sunday. You don’t have to have whole stock price amount to let the transaction between.

    As for early assignment, this is actually the best scenario that can happen, as you’ll get your max P/L if you exercise your long call. I haven’t had this happen to me, but what I’ve seen with other people’s experiences, seems like you have to manually exercise the long call. Once again, you should check with your broker regarding this as well.

    Don’t worry about asking all these questions. They are really good ones that someone getting into options and spreads should be asking. We’re all here to help each other out.

    Thank you for all your assistance. It’s really helpful. Going to start playing around with single contracts until I feel I’ve got it under my belt.

    When AAPL is rallying like it is currently, it seems like it wouldn’t be all that hard to set up reasonably safe ITM “net zero” $10-$15 spreads. Set one up and then move onto another and just wait until expiration for the cash to come in. If I get caught in a downturn, at least I’m holding an option I’m comfortable with. Seems simple enough…

    Myeah, the problem is, holding the long leg of a call and everything goes south, i.e., the dip that keeps on dipping. Legging is only “no risk” once you sell that short leg. And you can eat up the profits of several “free” spreads by having one call go horrendously red. And oh yeah, the lovely IRS doesn’t let you deduct losses, so they are even worse.

    Here’s my advice (not a specific trade, but a strategy):

    First off, do this legging biz in a paper acct first.

    Second, once you buy the long leg, immediately open a trading window - for the long leg. Yes, the long leg. Have a limit order ready to go and, should AAPL go red, eat a few bucks and dump that bitch and get the hell out.

    Lovemyipad uses the bank robber analogy. No dawdling, get in, and get F out. And it is better to get out of the bank without any money, and live to rob, er, trade another day, than to be killed or arrested by the police. Don’t assume AAPL will go up when you are holding that nekked call. Assume it may go down and be ready to dump it for a hundred dollars loss or so, instead of a couple thousand - or $20K. This is a hard-learned revelation on my part. Use it as you see fit…

    Trading is balancing greed and fear…

    [ Edited: 23 August 2012 03:34 AM by JDSoCal ]

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    Posted: 23 August 2012 03:57 AM #742

    JDSoCal - 23 August 2012 06:32 AM

    Myeah, the problem is, holding the long leg of a call and everything goes south, i.e., the dip that keeps on dipping. Legging is only “no risk” once you sell that short leg. And you can eat up the profits of several “free” spreads by having one call go horrendously red. And oh yeah, the lovely IRS doesn’t let you deduct losses, so they are even worse.

    Hmm… regarding losses… I wonder if Canadian Tax law is the same. I certainly hope I can deduct losses since I’ve already incurred some. Guess I should find out.

    JDSoCal - 23 August 2012 06:32 AM

    Here’s my advice (not a specific trade, but a strategy):

    First off, do this legging biz in a paper acct first.

    Second, once you buy the long leg, immediately open a trading window - for the long leg. Yes, the long leg. Have a limit order ready to go and, should AAPL go red, eat a few bucks and dump that bitch and get the hell out.

    Lovemyipad uses the bank robber analogy. No dawdling, get in, and get F out. And it is better to get out of the bank without any money, and live to rob, er, trade another day, than to be killed or arrested by the police. Don’t assume AAPL will go up when you are holding that nekked call. Assume it may go down and be ready to dump it for a hundred dollars loss or so, instead of a couple thousand - or $20K. This is a hard-learned revelation on my part. Use it as you see fit…

    Trading is balancing greed and fear…

    Good advice. Unfortunately, I’m already getting pretty familiar with being down 20k. That’s why I figured it would be good to work in options ranges close to ITM and far out so I’m not worried about holding them. Of course, the capital expenditures will be much larger and things can go south even faster. Thanks for the brain food.

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  • Posted: 23 August 2012 08:53 AM #743

    I keep it simple:  Buy ATM calls, preferably out a year and don’t trade it.  Now, I will swing trade some shorter term options on dips, but that’s my version of the bank robber strategy. 

    Nothing wrong with spreads, but when Apple’s valuation is still cheap with lots of upside remaining, the risk is less than what others would have you believe.  Holding straight calls w/AMZN, for instance, is crazy.

         
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    Posted: 23 August 2012 05:31 PM #744

    After giving all of this some thought, I think my strategy will be to continue to buy slightly OTM long expiration calls. If and when (assuming I haven’t cashed it out already) the call $50 up from my original strike achieves the same value, I will make the decision based on market sentiment whether to lock in the spread or just let the call run.

    The only risk I see for AAPL not continuing to appreciate over the long term is a large macro event. I’m just dipping my toes back in after cashing all my calls out on the run-up last Friday. Man did I time that poorly. Seem to be good at that. It’s a wonder that I’m up as much as I am.

    Anyway, happy that I’ve learned enough that I now have more options at my disposal smile

    Thanks for everyone’s input.

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    Posted: 23 August 2012 05:52 PM #745

    I’ve got a call into my accountant, but do any Canadians here know the tax obligations for options gains/losses?

    Are options trades still considered as capital gains (50% inclusion rate)?
    Can one apply losses against gains?

    Did a little more digging online and found this…

    http://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm

    Appears that you can apply losses against gains but there are a number of complicating issues. I love the last word…

    Tax Tip:  Leave option-trading to the professionals.

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    Posted: 23 August 2012 06:34 PM #746

    If someone could post some screenshots of spread trades.    I want to be positive on the exact mechanics of the trade.  Example:  APR 2013 BCS as mentioned in another thread.

         
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    Posted: 23 August 2012 07:20 PM #747

    Tetrachloride - 23 August 2012 09:34 PM

    If someone could post some screenshots of spread trades.    I want to be positive on the exact mechanics of the trade.  Example:  APR 2013 BCS as mentioned in another thread.

    Here’s what an order ticket for a spread at OptionsHouse looks like. Note that for OH, they only indicate Buy/Sell, as opposed to Buy to Open, Sell to Open, etc. that some other brokers might indicate.

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    Posted: 23 August 2012 07:35 PM #748

    Tetrachloride - 23 August 2012 09:34 PM

    If someone could post some screenshots of spread trades.    I want to be positive on the exact mechanics of the trade.  Example:  APR 2013 BCS as mentioned in another thread.

    Many of the brokerages offer free paper trading accounts which I used for about 60 days to practice the mechanics and to track different spreads to gain a rudimentary understanding between spreads.

    It actually was fun.  If is were a programmer I would make a video game based on option trading.  It could be set up so you play against the EOs.

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    Waiting to be included in one of Apple’s target markets, but I still own an iPod, iPhone and iMac and APPL stock.

         
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    Posted: 23 August 2012 07:59 PM #749

    nkmho - 23 August 2012 10:20 PM
    Tetrachloride - 23 August 2012 09:34 PM

    If someone could post some screenshots of spread trades.    I want to be positive on the exact mechanics of the trade.  Example:  APR 2013 BCS as mentioned in another thread.

    Here’s what an order ticket for a spread at OptionsHouse looks like. Note that for OH, they only indicate Buy/Sell, as opposed to Buy to Open, Sell to Open, etc. that some other brokers might indicate.

    tyvm nkmho

    I confirmed the bid/ask prices and the estimated cost of trade for a quantity of 10.

    The 3.96 is our limit price, it appears, and is halfway between the 3.25 and 4.65, plus a penny.

    I found the “Trade and Probability Calculator” at OptionsXPress.  Interesting .  It appears from the graph that as soon as AAPL hits 690 or 700, the value of what I purchased goes from zero to 1000 ???  That part I don’t understand. 

    thx in advance for any clarification.

         
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    Posted: 23 August 2012 08:34 PM #750

    cambrose - 23 August 2012 08:52 PM

    Did a little more digging online and found this…

    http://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm

    Appears that you can apply losses against gains but there are a number of complicating issues. I love the last word…

    Tax Tip:  Leave option-trading to the professionals.

    I don’t know if I’m reading this correctly, but to me, it appears that the writer of call options has to declare capital gains on the proceeds at the time of sale. Capital losses are declared when the option is bought-back. Capital gains/losses are assessed on long calls when the call is sold to close.

    So, to me this says, I would pay taxes setting up the spread and then again closing the spread. That doesn’t seem like a very good deal unless I’m missing something.

    Say I buy 10 calls at 700 for 50k. I then later write 10 calls at 750 for 50k. I owe tax on the 50k I just collected. When I close the spread ITM, the net gain will be 50k which I also owe tax on. So, I’ve netted 50k and paid tax on 100k. If I had just held the long call until it netted 50k, I would only be paying tax on 50k.

    Is this right?

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