AAPL July 2012 Calendar

[Guest]

In the realm of sounding like a complete hypocrite -- I just entered an AAPL calendar. With the lower volatility over the last 10 days, it actually fit my model perfectly.

The trade:

Bought July 21 560 Call @34.83

Sold May 19 560 Call @12.98

I particularly like this trade as it has so much time left in it and stands a very real chance of paying for itself in the next two weeks.

AAPL is consolidating around 560, and with the trend down, I moved down 2 strikes to give me some flex room on the declining price. However, even with a 20pt jump up, I can still expect to be getting close to $2.00 per week. With 10 weeks left in the trade (I DONT plan on holding that long), that would still make it worth it.

However, a word of caution, AAPL is a MUCH more volatile stock at heart, and this one bears close watching. It is a higher risk trade and should be treated as such. (I weight high risk trades differently than lower risk trades -- one half a position size).

The other trade I'm going to look at over the weekend is the AAPL DITM leap trade.

I'll post a full anlaysis of this calendar over the weekend.

[Guest]

No problem at all -- change the MCD one too.

[Guest]

Hi Chris,

Thanks for sharing this trade! Question: I did a quick Profit and loss chart on this trade and the graph based on your Long July 560 and short the May 19 560 break-even points are 522.68 and 568.23. Is this correct? "However, even with a 20pt jump up, I can still expect to be getting close to $2.00 per week." How does that then work out if the trade is at a loss at 568.23 approx. Thanks.

[Guest]

GOOG might be another calendar trade candidate too. Consolidating around $600 after earning.

[Guest]

This is completely off-topic but is there a way to not have to click "Follow this topic" every time a new thread comes out!

[Guest]

There is through the settings....

And no, that profit loss chart is completely wrong, as it frequenltly is with calendars -- it assumes just one sale and static option pricing.

Here's the trade again:

Bought July 21 560 Call @34.83

Sold May 19 560 Call @12.98

AAPL @568 (your calculations appear to have used a value just north of 570)

Your option calculator took the lazy approcach --

For downside break even = Current AAPL price (570) - premium received (12.98) - present value of July option (34.83) = 522.19

You can't do that though because the July option price is dynamic.

Calculating the break even on ONE calendar spread is quite difficult. Here is a way to get a close approxmiation:

http://www.poweropt.com/calcallspreadhelp.asp.

That said, it does not account for changes in volatility that happens over the spread.

For instance, if AAPL drops to 559, the short option expires worthless, but the July option is worth less.

Go read my post on how I calculate calendar values -- it will help. But basically when you are running a rolling calendar, as this is, you estimate the anticpated money from rolling the short position each week.

My "breakeven" occurs when I have received enough income, including the residual value of the long position, to break even.

So in this case I have shelled out 34.63 for the long and have gotten 12.98 for the short -- I need 21.65 more to "break even." If AAPL is at 568 (today's entry price) next Friday, and volatility remains the same, I should get another 12.98. And same for next week. So if AAPL stays right at 12.98 for the 10 weeks of this possible on the position, I would make 129.80 on the shorts on a cost of $34.63 (that would be awesome and make this the best trade I've ever made, by a mile).

That is not realistic. AAPL is volatile, and we can expect it to move. I figure out the expected moves, then use an option calculator to figure out the option pricing. If I receive $2.00 each week going forward, for the next 10 weeks, I would have $20.00 in my pocket, $32.98 including what I already have, and a residual value of about $2.90 -- so $35.88 and the trade makes money. So my goal is to make sure I can get $2.00 each week. If I get more, gravy.

[Guest]

FYI -- adjustments on volatile stocks are more difficult.

[Guest]

Chris,

Thanks for the explanations! What will you do if the stock does not corporate. I know you have some flexibility week to week ans I know you are not a fan of making it diagonal. Do you have a exit strategy in mind? -- Hannes

[Guest]

I always have an exit strategy in mind -- but here's the base of it:

If AAPL moves more than 35 pts in the first week AND the trade is less than 30% down -- I look to roll, diagnol, or double calendar

If AAPL moves more than 35 pts in the first week AND the trade is down more than 30% -- exit

In week two, again 35 pts

In week three, 45 points

In week four 55 points

Though once getting to week three or four, depending on the credits the previous weeks, your options open because a large part of the trade should be paid for.

You can't just use an absolute get out of the trade if AAPL moves up/down by more than a certain point -- primarily because if it moves that much, volatility is almost certainly higher, which increases the premiums and you might be able to stay in and still make money.

[Guest]

Very interesting trade. Too rich for my blood at the moment but it sounds very promising..

[Guest]

I'm in at $32.3...

[Guest]

DERSIDC- What is your trade entry?

[Guest]

Today was a great example how the increase in volatility can offset a drop in price.

On Friday I entered:

Bought July 21 560 Call @34.83

Sold May 19 560 Call @12.98

AAPL @568

Net cost: $21.85

Well AAPL dropped almost ten points today, and how did that effect the trade? Well, it was good news, the short May 19 Call dropped in value to $5.85 and the long July 21 Call only dropped to $29.50.

So, in other words, even though this trade moved against me (by ten points), I could have gotten out today for $23.65 -- at its peak during the day, the trade actually got up to $24.10 (actual fill) -- that would have been over a 10% return.

I strongly considered taking my profits at that point, but did not, as the potential profit is still quite large. This is just another advantage to the long date rolling calendars.

Please note that this gain (increasing volatility) happens almost exclusively in FALLING markets. In other words, if AAPL had jumped $10-$15 today, it would not have been as pretty as an outcome.

[Guest]

Sorry, I had a typo. My entry was $23.3 not $32.3...better to have a typo in this post than in the TOS order entry form...

[Guest]

Kim if you are going to start the calendar slightly delta positive what side of the calender should be delta positive? Thanks

[Guest]

you would do for example an out of the money call calendar spread. So with AAPL at 560 you would do something like the 570 Calendar (selling the weekly buying the longer dated) This way the weekly will have a smaller delta (say 35%) than the longer dated (say 45%) so you are small long. The idea is that if the stock drops - which should hurt you pos. as its long delta - that will be offset by rising IV (the longer dated option will profit more from that than you'll lose on the weekly) If the stock goes up vol usually drops but then you are long delta. So starting it slightly positive delta should give you a bit of an inbuild hedge no matter which way the stock goes.

[Guest]

What would happen to this type of trade during a market meltdown/meltup (market rose or fell 5-10% in one session) ?

[Guest]

What would happen to this type of trade during a market meltdown/meltup (market rose or fell 5-10% in one session) ?

you get creamed

you hope for stable markets. You realise the maximum profit if the tock is pinned to your strike - the further (and quicker) it moves away from it the more money you lose (however you max loss is capped at the initial premium)

[Guest]

Just as Marco stated, you hope for somewhat stable markets -- especially on the front end. If I have already received my entire outlay back, then I don't care. For instance, if I can get $12.98 the first three weeks, I've already made money even if the trade goes 100% the wrong direction. That's why I like these trades, they can consistently go slightly against you and still be profitable.

Now if AAPL drops 5% three consecutive weeks -- well that hurts. But even if it drops 2-3% a week, I can get $12 this week, $10 the next, $8 the next, etc., and still end up ahead.

Note that if the trade really starts moving against you after week 2 or 3 you can actually enter a diagnol risk free. By way of example:

AAPL July cost $34

Short May 19 received $12

Trade is "down" $22.00 (not really becuase the July has value, but you get the point)

Next week lets say I can only sell for $8 and the week after for $4.

Well now the trade is down just $10.00, with six weeks left. At this point, I may be able to sell the diagnol 550 or 540 and make that entire $10. If the price rebounds, the long call will go up too, offsetting the potential loss on the short. This requires a calculation matrix to figure out breakevens, but can be done -- just make sure you're protected against a price rebound.

[Guest]

That makes a lot of sense. Thanks for the help..

[Guest]

I think the only case where you can really lose big is when you get a large move just after you entered.

This is why it is so important to have a balanced portfolio with proper allocation. A quick 5% in AAPL will probably will followed by a significant market move, in which case the earnings plays have a good chance to make good money. This is why I less care to have few small losses in those earnings plays - I know that they are compensated by the gains in the ICs and calendars, but if IV suddenly spikes, you can make a year worth of gains in just few days like it happened to me last August.

Very good point Kim. Balance is the key for me.. Earnings plays have not been positive for me in the past couple of weeks but my other plays have made up for it... I give myself 5-10% for directional plays and balance the rest with +theta / -theta plays. Granted I am still very "Green" but I think I am on my way to finding something that works for me.. Know your strengths, weaknesses and tolerances.

[Guest]

I think the only case where you can really lose big is when you get a large move just after you entered.

This is why it is so important to have a balanced portfolio with proper allocation. A quick 5% in AAPL will probably will followed by a significant market move, in which case the earnings plays have a good chance to make good money. This is why I less care to have few small losses in those earnings plays - I know that they are compensated by the gains in the ICs and calendars, but if IV suddenly spikes, you can make a year worth of gains in just few days like it happened to me last August.

Kim,

please keep making comments like the one above and know that you have to be repetitive, because I usually do not get it the first/second time . You know, if you make basically the same point in three different threads it is really worth more because of the different context and thoughts. All the new material and the many moving parts are overwhelming at times. Your comments are very valuable guidelines. Hannes

[Guest]

A little off topic but I prefer to post on forums that are active.

Kim,

What do you use to monitor your portfolio greeks? I use AMTD and can get position greeks but it's time consuming to get a total position theta or delta. And a lot of the time those totals are greatly influenced by positions that are so far OTM that they really shouldn't count at all.

[Guest]

If anybody can answer question regarding Calenders. How would you adjust a trade when the short option (weekly) a few days before expiration or Wednesday the day before the next weeklies come out is approaching close to zero in value but your long position obviously still has value. For example I did a MCD calender in which the long is worth now .99 and the short is worth only .05. The dilemma then is if the underlying is moving down you are not gaining anything with the short as it approaches zero but are losing value on the long. Thanks.

[Guest]

I'd close the short in any case. If 5c is all that's left to gain that will hardly be a mistake. You can then hope for a bounce to sell the next weekly with the higher strike once its out.

[Guest]

I am in the MCD calendar also.. I am banking on MCD not falling apart today and being able to roll to the June week 1 tomorrow

[Guest]

What do you expect to get when you roll to the June week1 short? I'm in the MCD 92.5 calendar also

[Guest]

Thanks! Smasterlee are your strikes 92.5? Will you roll again too the same strikes?

[Guest]

I will see how MCD ends today. At $91.50 i would expect .25 - .30 for the weeklies. Ideally MCD rallies to $92 and we can get .50 or so for the weekly.

Right now I am looking to stay in the 92.50

[Guest]

There is an MCD thread -- don't hijak this one .

That said, the MCD trade is behaving EXACTLY as it should.

I would not close the trade today -- rather wait for the weekly's to open tomorrow and then do a calendar roll where you close this week's 92.5 and open next week's 92.5. Using an options calculator we learn, if the price of MCD and IV holds steady until tomorrow, we can expect a price of around .59 for next week and .06 for this week -- so you can net debit .53 -- which is perfect because it immediately puts the trade in the money.

I'm also moving this to the MCD thread -- please post there.

[Guest]

Thanks for advice Chris........did not see the MCD thread. Cheers.

[Guest]

AAPL is now down 25 points since opening the trade (4.3%), but the trade is still slightly up. Specifically, at close, mine was up 3.7%.

Tommorow is "roll" day. Using our option calculator, we can expect a price for the 560 option somewhere in the $5.70-$6.00 range. This is getting close to the level I'm not comfortable with -- if it was week 3 or 4, gravy, but not in week 2. Right now I would have to say there is a better than average chance I just take my small gain and move on.

I will of course fully evaluate after the opening, but I could be out of this fairly early.

[Guest]

AAPL is now down 25 points since opening the trade (4.3%), but the trade is still slightly up. Specifically, at close, mine was up 3.7%.

Tommorow is "roll" day. Using our option calculator, we can expect a price for the 560 option somewhere in the $5.70-$6.00 range. This is getting close to the level I'm not comfortable with -- if it was week 3 or 4, gravy, but not in week 2. Right now I would have to say there is a better than average chance I just take my small gain and move on.

I will of course fully evaluate after the opening, but I could be out of this fairly early.

Chris, why wouldn't you re-open the trade with the long June's closer to the ATM strike? Is it because there is now only 4 weeks to expiration on the monthly?

[Guest]

Well I'm in the July calendar -- so I still have 8 weeks left. The reason I might not re-enter is the trade might not make financial sense anymore, due to what expected moves are. I'm running the numbers right now and will let you know.

[Guest]

Ok, quick update, definitely not just rolling down to a lower strike. A 1SD move is now up above 30 points over the last seven days. The chances of either continued falling or a quick rebound of a large amount are just too great right now. This is the inherent problem with this trade on volatile stocks. Typically it works out better, and as Kim noted, if this move had happened in week 3 -- so what, but having a 5.6% drop in the first five days after opening the trade -- well that doesn't work as well. (570-538).

[Guest]

AAPL back to $560 today, up almost 6%...

[Guest]

Yep it is --- but, as everyone knows, I got out of it last week for a tiny gain (about 1.9% after commissions) due to the huge drop. Could I have stayed in and this trade reverted to a home run, sure, but if AAPL had fallen 20 instead of jumping 25 on Monday then I would have been in the brutal loss stage.

Going back to 560 makes it seem like this might be entering a range -- I'm going to watch it this week before deciding on another calendar or not. Seems more like an ideal OTM IC play.

[Guest]

yep. Looks like a new trading range before the next earnings in July. I was just writing an article for SA about a potential IC trade.

Looking forward to the article.

[Guest]

See great minds think alike.

[Guest]

See great minds think alike.

Do we get a subscription discount for flattery posts?

[Guest]

The article is out - http://seekingalpha....a-trading-range.

Kim,

Are you going to run this trade in our group too?

[Guest]

I will be most likelly entering a variation of that trade tomorrow -- however I will most likely have wider strikes and end up with a credit around the $1.00 to $1.10 range.

[Guest]

I will be most likelly entering a variation of that trade tomorrow -- however I will most likely have wider strikes and end up with a credit around the $1.00 to $1.10 range.

Thanks Chris,

wider strikes for a somewhat lower credit - does that mean that the trade would be more "forgiving"? Would you mind publishing the parameters after you place the trade? Thanks!

[Guest]

The risk and reward are directly related. By going with wider strikes, the risk is lower but also the potential gain. It is always a tradeoff.

kim - i really don't get how the RIC hedge affects the P/L? couldn't purchasing a weekly RIC essentially make the trade safer but also create the likelihood of no profit plus alot of commission fees? i have alot of trouble "visualizing" anytime we sell weeklies because the P/L graphs don't seem to tell the whole picture.

R

[Guest]

I will be most likelly entering a variation of that trade tomorrow -- however I will most likely have wider strikes and end up with a credit around the $1.00 to $1.10 range.

what about wider strikes but 10 points between the wings? i know it makes the max potential loss around $850 as opposed to around $350 with the trade kim recommends.

as i have been looking at ICs lately i have been more looking at the price difference in the wings rather than std deviation. for example some wings seem can actually be further out and have nearly the same price difference and thus provide very similar credit with less risk. also sometimes due to market sentiment the puts or calls at the same strike distance can be very different prices. chris - do you see that as an edge or do you feel the market is predicting a rise or fall when the puts or calls are more expensive for similar strike differences from the underlying price.

a made up example:

SPY @ 132

122 JUL PUT $1.15

142 JUL CALL $1.00

the put is still 10 points away but fetches a larger price.

[Guest]

I will be most likelly entering a variation of that trade tomorrow -- however I will most likely have wider strikes and end up with a credit around the $1.00 to $1.10 range.

One more completely unrelated topic Chris. How are you maintaining a full time job and this much trading analysis with a new baby! Usually there is no such thing as "free time" after having children!!!!

[Guest]

You're example with SPY is actually the norm -- the market is almost always downward biased -- so you'll get more credit from puts than calls. Sometimes its .05% more sometimes its as much as 5% more.

That's part of my "compliant" against volatility -- volatility does NOT measure volatility, rather it measures downward market pressure sentiment. I mean if the markets jump 500 points in a day, the VIX is going to crash, even though volatility has spiked by an obscene amount. That said, most people would be happy if the market goes up 500 and sad if it goes down 500 -- which is why puts are more expensive.

As to the SD moves -- I always look at both. I have to know the risk of a trade prior to entering. Once I know the risk, I look at the strikes. As I've stated before, on a 10 point spread, if I can't get at least $1.00 (10% return), I just pass. However, let's say I could get $2.00 -- well I'll probably move a little further out, just for the additional cushion.

As to this exact trade analysis, AAPL has been WILDLY volatile. If I were to trade the June expiration (23 days left), I would be looking at the following:

In the last 30 days, a 30 day SD move is 58 points. The largest move over a 30 day period was a whopping 102 points -- which is frankly eye popping. In the last 30 days, a 14SD move is 25 points.

After going through all of the variations, I know I'll need at LEAST a 80 point cushion on the spread, and preferably much more.

To get my 10% return, I would have to use the 620/630 call and the 480/490 put. Simply not worth it.

Now Kim's trade was using the July spreads -- but I don't ever trade non-index based short condors further than six weeks out. I know what the "odds" and statistics say, but I can look at four years of trading logs (paper and actual) and tell you that I lose on those trades all the *#($& time.

As to my trading analysis -- ask Kim, it's dropped off some. That said, I've never slept much, only about 5 hours a night, since I was 15 or 16. It also helps to be the person in charge too.

[Guest]

I am still in my May w4/July 555 calendar but have hedged it with weekly verticals (essentially a RIC)

[Guest]

thank you kim and chris for your responses.

[Guest]

Kim,

With AAPL at 572 what would be good strikes for a weekly RIC to hedge the JULY IC ?