Friday, March 16, 2012

Comments on Mikes $AAPL Options Action trade

as usual i have some comments about a trade on options action and why i would not take it. mike khouw recommended:

Sell Jun 600/630 call credit spread for about $1000 credit for each lot

for every one lot you will need about $2000 of buying power. if youve followed my past trades / blogs / setups etc you will know i  have certain guidelines i use to enter credit spreads. nothing magical about them its just what ive used to get my system. lets go step by step:

1. Call credit spreads: I dont like and rarely enter into credit call spreads. have had a poor track record getting winners, dont like rooting for stocks to not go up and when im wrong i seem to be wrong big time where the stock takes off and i have to take a loss vs rolling to following months. red light for this rule

2. Probabilities : using the Trademonster analyse tab. it shows that this trade as of todays pricing has a 56% probability of max profit. that is almost a coin flip. thats almost like guessing. anything could happen of course but when given a choice i would prefer to enter a trade that has a 75% + probability of max profit vs 50%.. red light for this rule

3. Time to expiration: this is a Jun spread which is 92days away. this will give you plenty of time to let the stock recover if it moves against you if you have the discipline to hold to near expiration. (like mikes trade from Jan on GOOG..would have been a winner if held). I am going to assume i never have picked the exact top or bottom and stock will move against me, so i need at least several weeks of time left before opex for stock to recover. this is the main reason i do not sell weekly credit spreads. you might be comfortable with it but i have to go with what my trade history shows (which means you should be keeping track). Green light for this one

4. Does earnings impact the spread (ie, does company report prior to opex). Several issues with this. AAPL reports right after Apr opex. Anything could happen, either blowout earnings again and stock rallies or a miss and it drops. no one knows, i dont know, mike doesnt know. so we are back to a coin flip for the earnings event. for every spread i have on before earnings that profits ive had one that was big back to 50-50. Secondly, earnings will spike the volitility of the options (price). though this will mainly be focused on the weekly options for that week, this increase will still affect this June spreads against you enough that it will wipe out alot if not all of the time decay. Red light on this one.

5. Simplicity - honestly i dont know how easy it would be to adjust a $30 wide spread if i had to. i would assume that the bid/ask when rolling would be wide which would make is harder to get split the bidask to get a decent fill. Instead compare it to the Jun625/630 credit call spread.. selling 7lots gets you $1100 premium, need $2300 of buying power and has 64% probability of max profit ... with that i get an easier ability to adjust the position if needed to a following month. Also look at the breakevens on mikes spread vs my example one.. his 600/630 with $10 premium .. loses money at 610 or higher at opex.. my example 625/630 with $1.60 premium starts to lose money if stock is 626 or higher.. so my example trade makes almost the same amount, risks almost the same amount, has a higher probability of max profit and has a breakeven $15 higher. Yellow light on this one

6. Technicals - i prefer to use support / resistence / moving averages to base my short strikes on.. AAPL just hit 600 yesterday so this call spread would be right at that resistence. if i had too i would use a higher strike for more cushion but thats just me. Marginal green light for this

bottom line is i would not enter this trade, mainly because i dont like call credit spreads, the probability of max profit is far too low, the spread will be affected by earnings in april. alot can happen at Apple and in market by June so if i had a short thesis like mike did i would go for a shorter term trade, Apr opex to start like Dan Nathan was getting at. I will paper trade this spread because im curious as to how it will look if i try to roll it.

what does Nikki have to do with this trade???? nothing at all.. not even a little bit.. its your treat for reading