Stress testing AAPL Portfolios for Black Swans

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    Posted: 23 August 2012 04:49 AM

    I haven’t posted here in a while, though I lurk often. Making ATHs every day recently and enjoying (finally) some movement since March/April. A couple of posts in the intraday got me thinking in a direction that I haven’t been thinking for a couple of years now, since switching primarily to options in 2010.

    E*Trade has this feature called “stress test” - which I haven’t used and don’t think it would work with my, umm, AAPL-options-loaded portfolio - but the premise is simple: enter different levels of price, calculate portfolio results. They have events such as 1987 crash and 9/11 there if you hold index funds, but we can do similarly for AAPL. I haven’t done a real “stress test” in… well, ever, I confess. rolleyes Just eyeballing my different strikes, if AAPL falls below $500 and stays there through Jan ‘14, I’ll lose over 95% of the non-cash portion of my portfolio. This year, I’ve had between 0% and 50% cash, currently around 20%. *Gulp* :bugeyed:

    Gregg Thurman - 23 August 2012 02:53 AM

    ...
    It isn’t really options margin, its called Portfolio margin. If your portfolio includes, or is exclusively, options so be it.

    I had such an account in 2007.  It was great right up to the last week of December.  Then AAPL crashed.  I lost 80% of a $5 million portfolio overnight.  Haven’t used any margin (excepting the kind necessary to facilitate Spread trades) since.

    And after seeing $4M evaporate before your eyes you’re back in the market? :bugeyed:
    Gregg, you prove once again that you have massive balls of steel. (Excuse me, lovemyipad)

    This brings up a point of “black swan” (or should I say, black swoon?) kinds of events. What happened in January 2008? Honestly, I don’t remember even though I had shares back then. 200 to 130 - 35% haircut in a month? A year after the friggin’ iPhone got announced? Holy crap. Then there’s the 50% drop in 2000. And the 60+% slow drop to $80 in 2008 that wiped out many members here. We’ve been pretty much on a straight line up since March 2008, save an occasional flash crash or earnings miss.

    So, the question is: How do folks here prepare for Black Swan events?

    mjuarez - 23 August 2012 05:33 AM

    ...I’m thinking we see $730 before we see $650 again. And at that point, all the analysts left behind will be increasing their targets, urging customers to buy, which makes other analysts raise their targets, urging their customers to buy, ad infinitum.  A run to $800 by year end is not out of the question, IMHO.

    That’s what I mean. Less than a month ago everyone here was calling for $530. Now we have $730. Don’t get me wrong, I’d love another run at $680 tomorrow to sell my naked Jan ‘14 $790 calls (which I decided are too much for my stomach).

    But consider this:
    - In calendar 2010 AAPL was up ~55% for the year
    - In calendar 2011 AAPL was up ~25% for the year
    - In calendar 2012 AAPL is up 65% YTD. A run at $800 would put it near 100% for the year, the kind of growth not seen since post-bottom 2009.

    Another way to look at it is PE expansion - yes, we’ve actually had PE expansion this year for the first time since late 2009. What if we have a contraction following, say, disappointing fiscal Q4 results? Or disappointment from lack of “one more thing” announcement of iPad Mini or iTV?


    To wrap it up (sorry for the long post), I’m as excited as anyone for the next-gen iPhone, which will be the biggest consumer product launch in history. I’m also bullish on AAPL. I am wondering, however, what portfolio preservation strategy people have in mind in case of the unthinkable… Unless, of course, everyone is prepared to live through something similar to Gregg’s end-of-2007 Amazing Vanishing Portfolio (TM) experience. LOL

    Edit: Clarify Jan ‘14 position

    [ Edited: 23 August 2012 04:53 AM by Roman ]      
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    Posted: 23 August 2012 05:05 AM #1

    TL;DR

    I’m something like 80/20 long/short AAPL trades, yes even in this uptrend, yes even though it’s costing me gains and I hate it and it sucks LOL

    QED

    wink

    OK, in all seriousness?  My answer:  Nimbleness.  We don’t shoot skyward in a day and we don’t fall off a cliff in a day either.  There will be enough signs and clues to switch directions and either mitigate damage or even profit a bit from downside. 

    AMZN will be the World’s Easiest Short if ever the markets go megabear for a while.  Sorry AMZN fans (hey, I buy stuff from them too), but it’s true.  You don’t even need the multiple to drop much under 200 for a good downside hedge. :D

    [ Edited: 23 August 2012 05:09 AM by Mav ]

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
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    Thanks, Steve.

         
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    Posted: 23 August 2012 05:07 AM #2

    And you brought it up yourself, actually:

    Cash:  The Ultimate Hedge(tm).  (Never mind the debate on currency valuations, and it’s not like you can buy a hamburger or tofu dog with gold bars anyway.)

    Signature

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

         
  • Posted: 23 August 2012 12:56 PM #3

    I’ll be doing spreads in the next 1-2 months, and yes, for the very first time.

         
  • Posted: 24 August 2012 01:25 AM #4

    Thanks for this reminder. I hedge about half of my AAPL delta by being short on SPY, but there is still the danger of AAPL alone stalling while the broader market continues.

         
  • Posted: 24 August 2012 01:55 AM #5

    Hedging is for sissies. Or people far smarter than me. Or both.

         
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    Posted: 24 August 2012 02:04 AM #6

    You just two-thirds offended about 50% or more of the active AFBers.

    I know, not like you care.

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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: 24 August 2012 10:03 AM #7

    Mav - 23 August 2012 08:05 AM

    (...)OK, in all seriousness?  My answer:  Nimbleness.  We don’t shoot skyward in a day and we don’t fall off a cliff in a day either.  There will be enough signs and clues to switch directions and either mitigate damage
    or even profit a bit from downside.
    (...)

    Caveat: unless you have short-term unhedged calls, which a sudden drop will turn to dust.

         
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    Posted: 24 August 2012 12:43 PM #8

    Mercel - 23 August 2012 03:56 PM

    I’ll be doing spreads in the next 1-2 months, and yes, for the very first time.

    Assuming you are referring to BCS and even these will turn to shite in a black swan event with AAPL closing below your lower long strike.

         
  • Posted: 24 August 2012 02:40 PM #9

    Mav - 24 August 2012 05:04 AM

    You just two-thirds offended about 50% or more of the active AFBers.

    I know, not like you care.

    I thought I was mostly offending myself.

         
  • Posted: 25 August 2012 01:19 AM #10

    Test

    [ Edited: 05 September 2012 01:57 AM by cbongiova ]      
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    Posted: 25 August 2012 03:11 AM #11

    Technically, the ITM spreads could get killed too, though it’d take a lot more to erase their value.

    The only sure thing about trading is that there’s no sure trade, though of course ITM spreads do carry less risk.

    Signature

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

         
  • Posted: 25 August 2012 03:17 AM #12

    Mav - 25 August 2012 06:11 AM

    Technically, the ITM spreads could get killed too, though it’d take a lot more to erase their value.

    The only sure thing about trading is that there’s no sure trade, though of course ITM spreads do carry less risk.

    I’m not saying it won’t get killed.  It will.  Just a lot less than most other option strategies and not much worst than the stock itself.  All else being equal I think this strategy gives you a far superior risk/reward than just buying stock or holding a ton of cash while still allowing you to make a good % gain and even allows you to roll it up or down if things go well or badly.

    Do you know of any strategies stocks, options or otherwise that won’t get killed with a 25% haircut in a couple of days and will still provide a 25% annualized return?

    I haven’t found one, but would love to try a new strategy if there is one.

         
  • Posted: 25 August 2012 03:21 AM #13

    madmaxroi - 24 August 2012 03:43 PM
    Mercel - 23 August 2012 03:56 PM

    I’ll be doing spreads in the next 1-2 months, and yes, for the very first time.

    Assuming you are referring to BCS and even these will turn to shite in a black swan event with AAPL closing below your lower long strike.

    I’ll have less at risk and therein lies a degree of protection.  In any event, Black Swans are like the boogeyman, more imagined than real. 

    Fortune favors the bold….

         
  • Posted: 25 August 2012 03:24 AM #14

    lovemyipad - 24 August 2012 01:03 PM
    Mav - 23 August 2012 08:05 AM

    (...)OK, in all seriousness?  My answer:  Nimbleness.  We don’t shoot skyward in a day and we don’t fall off a cliff in a day either.  There will be enough signs and clues to switch directions and either mitigate damage
    or even profit a bit from downside.
    (...)

    Caveat: unless you have short-term unhedged calls, which a sudden drop will turn to dust.

    Lovey, I have cured myself of short term options, which for me expire inside 2-3 months.  I may hold 20-30 short term contracts, but that will be it.

         
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    Posted: 25 August 2012 03:31 AM #15

    That doesn’t like a cure.  Maybe management wink

    Btw, it’s so strange, but I see only “white swans” right now…

    Signature

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