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  1. AAPL Trade Idea

    June 16, 2014 by Sadie Joutras

    Oh, how I miss the expensive AAPL  stock price before the split, let me name the ways: More premium for credit spreads, less commissions because I didn’t have to do as many contracts with a $500 stock price. Any positive things about the split? Yes, liquidity, which was great before the split, should be better. Why? Option bid/ask spreads will be narrower and more folk will be trading options with these cheaper  stock prices.  Option Volatilities are a bit higher, maybe 15%, than before the split. At-the-money Implied volatilities are around 20 now and they were around 17 before the split. This is pretty normal when stocks get less expensive after a split, moderate increases in Implied Volatility usually result.

    Range Bound Trade with great risk/reward? Iron Butterfly ( 2 Credit Spreads). AAPL price around $91.90

    Using the July 3 expiration, Buy  one  95 call and sell one  92 call. In the puts, buy one  89 put and sell one 92 put. Total Credit around $210. The total risk if AAPL goes to zero or up to a billion is $90. How did we get $90 Maximum loss? If AAPL goes to zero, I did a 3 point wide put credit spread that will max out at a $300 loss. Subtracting the credit of $210, that leaves us with a potential $90 loss. Great risk/reward to bring in a  potential profit of $210 with risk of only $90. I like Iron Butterflies for shorter term trades, (the July 3 expiration for this trade is about 16-17 days from expiration). Where would I worry a bit about this trade and either exit or adjust the trade?  Near the expiration Breakeven points of roughly $90 on the downside and $94 on the upside. How much money would you probably put up at your Broker for this trade? Depends on your Broker, but the number should be around $90, the risk of the trade. Should I try to make the entire Credit? No, that would require AAPL being exactly at short strike of $92 in about 17 days, tough to hit the Bulls eye like that. I would shoot for maybe 25% of the credit or $50 per  1 Contract . That would give us about $50 profit on $90 of risk or capital if I did this 1 contract.

    Work on the Craft and have a great day! 
    Dan Sheridan 
    dan@sheridanmentoring.com

  2. AAPL June Bullish Play

    April 15, 2014 by Sadie Joutras

     

    This is a Bullish play in AAPL for the June expiration. It is inspired by one of the Sheridan mentoring resident AAPL experts and my friend , Leo Andrade. With AAPL at around $518 , I am going to take a bit of a bullish bias as I look out to June. The strategy is a Bullish Butterfly: Buy 1 June 530 call , Sell 2 June 540 calls, Buy 1 June 550 call for a total debit around $70. The good the bad and the ugly: if the stock goes to 540 over next 30-66 days, great! If it goes to $540 over next week, we yell ” Where’s the beef”! In bullish Butterflies, we want the stock to go near the short strike, but closer to expiration , not right away.Total risk is $70 cost, just like a long option. Directional Butterflies are very forgiving. If we go outside profit area of 530 and 550 over next 30 days, the spread doesn’t go against us nearly as bad as if we go out side our profit area of 530 and 550 near expiration. This is a cheap speculative trade of $70. If I did it 3 times, 3-6-3, it would cost 3 times $70 or $210. My plan is to make 50-60% on the cost of the trade.

  3. Covered Writes for the Downside?

    December 4, 2013 by Shawn

    2013 has been a banner year for Covered Writes. The market is up big and this bullish strategy has been like an ATM machine. The S and P’s have climbed from the 1400 level to its current peak around  1800 . That’s an increase of over 25%! What are your expectations for the rest of 2013? How about 2014? Maybe you are still bullish, but you would like to have a little less exposure on the downside in 2014? If you did 4 covered writes per month in 2013, maybe you’d like to cut back a bit and take a little capital off the table? How can I diversify my covered write risk? One way is to have a few covered writes for the downside to diversify my exposure in my retirement portfolio . Most stocks are in the upper end of their 12-24 month price range . I will show you an example of a covered write type strategy for the downside that doesn’t involve stock. This will keep the cost and margin down significantly. Before I give an example for the downside, let me give an example of a covered write and Long Diagonal for the upside to lay the proper foundation. Using XYZ stock at $100 as our example, a covered write example would be to buy 100 shares of stock at $100 and sell 1 January 110 call at $1.00. This would be very expensive in an IRA account with your broker because of the cost of the stock. To do this strategy using an in-the-money call instead of the stock purchase would be called a Long Diagonal, and it would reduce the margin at your Broker significantly. The Long Diagonal alternative might look like this: Buy 1  March 85 Call and Sell the same January $110 call. Because the cost of the long call would be much cheaper than the cost of the long stock, the margin on the Long Diagonal would be much cheaper than the Covered Write. The graphs would look similar.

    The following example is a Put Diagonal with a covered write type graph, but on the downside:

    Put Diagonal example in AMZN: $390. Amazon started the year around $250 and is currently around $10 from the highs of the year. The stock is up around 55-60% for the year. Not all stocks are up this much for the year but many are up significantly. Even if you still like AMAZON , you might not expect similar returns next year, and might even think it could pull back a bit. A Put Diagonal would fit the bill. With the stock around 389-390 level, I might buy 1 April 440 put for $62 and sell 1 January 385 put for $13. The net debit for this put Diagonal would be $49. If I did this 1 time at my broker in an IRA account, it would cost about $4900, the cost of the debit. On the downside, at expiration, I could make from around $1000 at the short strike of $385, to around $600-$800 if we go down even near the $300 level. On the upside, we have an expiration Breakeven around $401, which I would use as a trigger to either take off or adjust. One adjustment idea if we are wrong, as we approach $400 level on the upside would be to roll the short 385 puts up near the 400 strike in the same expiration month.

    Conclusion: This is a timely strategy to discuss in this market environment because many people might want to lighten up a bit on their long exposure with covered writes and cash secured puts, and this is one way to do it.

    Have a wonderful Day! 

    Dan Sheridan 

    Call Sheridan Options Mentoring to learn how we can help you. 800-288-9341  

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