Wednesday, February 22, 2012

The Free Trade on $AAPL

Heres the scraped together enough cash to buy 100 shares of $AAPL stock. You expect great things to happen the next 3weeks from shareholder meeting, Ipad3, whatever and you want to get double the upside move and might as well throw in you want that double upside for no added risk. Heres what you do, buy a ratio spread.. also called a backspread.  You already own 100 shares so now you:

Buy 1 Mar 525 call  for $11.50
Sell 2 Mar 540 calls for $6.50 each

trade will be for a small credit.

Stock is about 515 now. Max profit on just those options is at 540, which will be $1500. Stock appreciates at same time for profit of $2500 for total of $4000 profit with the same risk as just owning 100shares.

The ratio spread profits between 525-555... so anything the ratio brings in is better than you would have made just owning the shares

Things to do at opex:
1. stock below 525 then ratio expires worthless and you keep small credit.
2. stock between 525-555, close ratio spread for profit.
3. stock above 555, close ratio for loss but your shares appreciation far offsets that.
4. if stock above 540 i guess you can let the your shares get called away at 540 and you made the profit from the ratio..but i would do #3 if it came to that

This technique is often recommended as a trade repair when your stock drops, as a way to get back to break even..but why wait for stock reason you cant do it when you expect upside move. At some point profit is capped but thats not a bad problem to have after $4000 gain

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