Official AAPL thread
12-14-2006, 08:30 AM
#2
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As a long investor in AAPL I'm starting to get just a little uncomfortable with the stock. It's a fine company and I think they will post another record quarter and blow away the numbers and for tha alone I think it's a $95 stock.
However what has me uneasy is a general consensus that on January 9th Apple will announce an "iPhone" at MacWorld, a week before the 10Q for the first quarter. My concern is that with analysts pegging the stock at $110-$120 it will get crushed ahead of the quarter if they don't make such an announcement. It's starting to feel really speculative and that has me at the out bounds of my risk tolerance. Sure if they do announce the phone it's game on and I want to see that upside but if they don't the holiday quarter results are going to go out the window as nobody will care.
So here is my thing. Do I:
1. Sell the stock on the run up to MacWorld and hope the phone doesn't come and get back in just before the earnings report;
2. Hold the stock and take my chances on the iPhone looking longer term and ignore any shorter term volatility;
I'm starting to get uneasy and am considering switching out of my speculative LVLT position and going into something more stable and making AAPL my speculative position at least until the January chaos has blown over. Am I out on a limb?
However what has me uneasy is a general consensus that on January 9th Apple will announce an "iPhone" at MacWorld, a week before the 10Q for the first quarter. My concern is that with analysts pegging the stock at $110-$120 it will get crushed ahead of the quarter if they don't make such an announcement. It's starting to feel really speculative and that has me at the out bounds of my risk tolerance. Sure if they do announce the phone it's game on and I want to see that upside but if they don't the holiday quarter results are going to go out the window as nobody will care.
So here is my thing. Do I:
1. Sell the stock on the run up to MacWorld and hope the phone doesn't come and get back in just before the earnings report;
2. Hold the stock and take my chances on the iPhone looking longer term and ignore any shorter term volatility;
I'm starting to get uneasy and am considering switching out of my speculative LVLT position and going into something more stable and making AAPL my speculative position at least until the January chaos has blown over. Am I out on a limb?
12-14-2006, 04:26 PM
#4
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Well, unfortunately AAPL's implied volatility is quite high right now, making any options trades a bit on the pricey side.
IMO, there's really only two ways to properly play something like this when your concerned about protecting capital. Which way you go depends upon whether or not you want to keep the stock long term or to get out.
If you want to keep the stock, buy 1 april put for every 100 shares of stock you own. As soon as the iPhone report comes out in Jan and you feel like the turbulence is over, sell the put for whatever you can get. The reason why you want something several months out is because most of the time value in an option is lost in the last 30 days of an option's life. By spending a bit more for the longer term option then selling it fairly quickly, you don't lose as much money in time value.
Since you shouldn't lose much time value, I'd probably pick a out-of-the-money put for this strategy to reduce cost, like a Apr 80 or 75 put.
If you really want to get out of the stock, but want to play the iPhone report, sell your stock now, and buy 1 jan call for every 100 shares of stock you own. Right after your iPhone report but before the option expires, sell the calls for whatever gain you get. The idea here is that you're locking in any gains you already have, putting at risk only the cost of the option. You want a deep in-the-money call for this one, because you'll be playing the option almost right to expiration, and you don't want to pay for a lot of time value. Either a Jan 75 or Jan 80 call looks good to me here.
That's what I would do, but i'm no investment broker, so take whatever I say with a grain of salt..
Personally, I like the call option better, because you only have a 10th of the cash tied up for the same risk/reward.
IMO, there's really only two ways to properly play something like this when your concerned about protecting capital. Which way you go depends upon whether or not you want to keep the stock long term or to get out.
If you want to keep the stock, buy 1 april put for every 100 shares of stock you own. As soon as the iPhone report comes out in Jan and you feel like the turbulence is over, sell the put for whatever you can get. The reason why you want something several months out is because most of the time value in an option is lost in the last 30 days of an option's life. By spending a bit more for the longer term option then selling it fairly quickly, you don't lose as much money in time value.
Since you shouldn't lose much time value, I'd probably pick a out-of-the-money put for this strategy to reduce cost, like a Apr 80 or 75 put.
If you really want to get out of the stock, but want to play the iPhone report, sell your stock now, and buy 1 jan call for every 100 shares of stock you own. Right after your iPhone report but before the option expires, sell the calls for whatever gain you get. The idea here is that you're locking in any gains you already have, putting at risk only the cost of the option. You want a deep in-the-money call for this one, because you'll be playing the option almost right to expiration, and you don't want to pay for a lot of time value. Either a Jan 75 or Jan 80 call looks good to me here.
That's what I would do, but i'm no investment broker, so take whatever I say with a grain of salt..
Personally, I like the call option better, because you only have a 10th of the cash tied up for the same risk/reward.
12-14-2006, 04:58 PM
#5
Administrator
Thread Starter
Thanks for the advice 
I'm brand new to options but I understand the power they have. I'll do some research on your suggestions and see what makes sense. I really just wasn't sure where to go with it.
I'm brand new to options but I understand the power they have. I'll do some research on your suggestions and see what makes sense. I really just wasn't sure where to go with it.
12-14-2006, 05:33 PM
#6
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Thread Starter
So let me get this straight 
Assuming I have 100 shares of AAPL and I want to set my range at between $80 and $100 (10 up/10 down from here):
I should buy 1 April 85 put at say $5.50. If things do well and the stock goes to say $100 I can sell the put for worst case $2.50 and dump the stock for a net of $9750. If things don't work out and the floor drops out of the stock I exercise the put and sell my shares for $85 for a total of $8500 less $550 and net $7950.
Good: $9750, Bad $7950
or
I sell the 100 shares for $90 let's say and buy a Jan 80 call for $10.20. If things go badly I eat the $1020 call for a net of $7980 but if things go well and the stock goes up I net $9980 when I exercise the call.
Good: $9980, Bad: $7980
In both cases I get all the upside and limit my loses to $10 on the down side but with the put option I need $9550 in capital invested to return a conservative $9750 (2%)and with the call I need only $1020 invested to return a conservative $9980 (978%)
Is that right?
Assuming I have 100 shares of AAPL and I want to set my range at between $80 and $100 (10 up/10 down from here):
I should buy 1 April 85 put at say $5.50. If things do well and the stock goes to say $100 I can sell the put for worst case $2.50 and dump the stock for a net of $9750. If things don't work out and the floor drops out of the stock I exercise the put and sell my shares for $85 for a total of $8500 less $550 and net $7950.
Good: $9750, Bad $7950
or
I sell the 100 shares for $90 let's say and buy a Jan 80 call for $10.20. If things go badly I eat the $1020 call for a net of $7980 but if things go well and the stock goes up I net $9980 when I exercise the call.
Good: $9980, Bad: $7980
In both cases I get all the upside and limit my loses to $10 on the down side but with the put option I need $9550 in capital invested to return a conservative $9750 (2%)and with the call I need only $1020 invested to return a conservative $9980 (978%)
Is that right?
12-15-2006, 05:55 AM
#7
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You got the basic idea right. There's a couple subtleties regarding how the option price tracks with the sale price based on implied volatility (which is used to calculate the stock's "beta"), but in general, you are right.
Your worse case analysis is a bit off. With options, the worst case is *always* that you lose all of its value. So, in the put example, the "best" scenario is that AAPL rockets to 110 or more. That's probably high enough to make your put worthless. What you do here is dump the shares and hope that between now and apr the stock corrects, so you can pick back up some value in the option.
For the put trade, the extremes are as follows:
AAPL tanks to 40. The put is now deep in the money and is worth 4500 (I.e, (85 - 40) * 100) You sell all your shares for 40. OR, you decide AAPL is a great stock to have at 40, so just keep it. Either way, you're looking at 8500 + tieing up a bunch of capital.
Say AAPL rockets to 110+ Your put is worthless. Your upside is limited to the stock price - the cost of your option ($550 in this case). You might get some of that money back if you sell the stock and hope the stock falls in the next couple months, but if you intended on selling the stock in the first place, you picked the wrong trade by buying the protective put. You pretty much bought a $550 insurance policy you never needed.
You got the call trade wrong though. In option trading, it is really very rare that you actually exercise the option. It's almost always better for you to sell it before it expires. That way, you can get back at least a little bit of the time value left in the option, and you don't have to pay your broker fees for exercising such an option.
But you got the basic idea right. You get similar risk/reward performance between playing it was a stock with a protective put vs a straight up call. This difference is that the protective put limits some of your upside at the benefit of lowering your downside risk even more. The benefit of the call trade is that you outlay much less capital doing it.
Or, just to muddy the waters a little bit, you can play it differently:
Lets say you thought all the hype was BS and nothing really substantial was going to happen in the next 3 months, expecting AAPL to be mostly flat. You can SELL a APR 90 call now, putting $830 dollars in your pocket right now. You have to hold the stock until april in case the option ever gets exercised. Now, when april rolls around, three things could have happened:
1. The stock rockets up. Sorry, you lose, because the call you sold gets exercised against you. Your gain is 9830. (someone buys your 100 shares for 90/share + you still have the $830) you got back in Dec. not too shabby, but could have been better. You're only solstice here is that if the call you wrote has no time value because it's deep in-the-money, you can get out out of the trade immediately by selling the stock and buying back the call for a net of 9830, unlocking your capital for something else.
2. The stock tanks. This kind of sucks, because you lose, but it's really not the end of the world. The way to handle this is to buy back your call as soon as it's worthless, and immediately sell your stock. You almost break even in this case.
3. The stock is right at $90/share in apr. This is your best case scenario, because the stock isn't worth enough for your call to be exercised, so it expires worthless. Again, you hit your maximum gain of 9830.
Played correctly, the covered call can limit your losses to almost zero, at the cost of limiting your maximum gain and tieing up capital for 3 months. There's a strategy for everything, it all depends how you think the future is going to unfold.
It's *VERY* tempting to fool yourself into doing all your trading via options. Be very careful if you do this, because you can *ALWAYS* be totally wiped out in any one trade pure option trade. This is a common mistake of beginner options traders. Don't be seduced by the dark side!
Your worse case analysis is a bit off. With options, the worst case is *always* that you lose all of its value. So, in the put example, the "best" scenario is that AAPL rockets to 110 or more. That's probably high enough to make your put worthless. What you do here is dump the shares and hope that between now and apr the stock corrects, so you can pick back up some value in the option.
For the put trade, the extremes are as follows:
AAPL tanks to 40. The put is now deep in the money and is worth 4500 (I.e, (85 - 40) * 100) You sell all your shares for 40. OR, you decide AAPL is a great stock to have at 40, so just keep it. Either way, you're looking at 8500 + tieing up a bunch of capital.
Say AAPL rockets to 110+ Your put is worthless. Your upside is limited to the stock price - the cost of your option ($550 in this case). You might get some of that money back if you sell the stock and hope the stock falls in the next couple months, but if you intended on selling the stock in the first place, you picked the wrong trade by buying the protective put. You pretty much bought a $550 insurance policy you never needed.
You got the call trade wrong though. In option trading, it is really very rare that you actually exercise the option. It's almost always better for you to sell it before it expires. That way, you can get back at least a little bit of the time value left in the option, and you don't have to pay your broker fees for exercising such an option.
But you got the basic idea right. You get similar risk/reward performance between playing it was a stock with a protective put vs a straight up call. This difference is that the protective put limits some of your upside at the benefit of lowering your downside risk even more. The benefit of the call trade is that you outlay much less capital doing it.
Or, just to muddy the waters a little bit, you can play it differently:
Lets say you thought all the hype was BS and nothing really substantial was going to happen in the next 3 months, expecting AAPL to be mostly flat. You can SELL a APR 90 call now, putting $830 dollars in your pocket right now. You have to hold the stock until april in case the option ever gets exercised. Now, when april rolls around, three things could have happened:
1. The stock rockets up. Sorry, you lose, because the call you sold gets exercised against you. Your gain is 9830. (someone buys your 100 shares for 90/share + you still have the $830) you got back in Dec. not too shabby, but could have been better. You're only solstice here is that if the call you wrote has no time value because it's deep in-the-money, you can get out out of the trade immediately by selling the stock and buying back the call for a net of 9830, unlocking your capital for something else.
2. The stock tanks. This kind of sucks, because you lose, but it's really not the end of the world. The way to handle this is to buy back your call as soon as it's worthless, and immediately sell your stock. You almost break even in this case.
3. The stock is right at $90/share in apr. This is your best case scenario, because the stock isn't worth enough for your call to be exercised, so it expires worthless. Again, you hit your maximum gain of 9830.
Played correctly, the covered call can limit your losses to almost zero, at the cost of limiting your maximum gain and tieing up capital for 3 months. There's a strategy for everything, it all depends how you think the future is going to unfold.
It's *VERY* tempting to fool yourself into doing all your trading via options. Be very careful if you do this, because you can *ALWAYS* be totally wiped out in any one trade pure option trade. This is a common mistake of beginner options traders. Don't be seduced by the dark side!
