Wednesday, April 11, 2012

How to use a Diagonal Spread on $AAPL

This strategy is for a bullish thesis and is exactly like a covered call with stock. Instead of buying 100 shares for $63000, buy a Jan2014 500 strike call for about $183 ($18300). if you pull up the "delta" for this option it is about .76 which means for every $1 move in the stock, this option goes up .76 cents..$10 move =$7.60. So with this LEAP option you can get 76% of the participation without having to shell out huge amounts of cash.

Buy Jan2014 500call for $183

Nowadd a short call in the front month to bring in some income from month to month..(just like a covered call), lets use May since April is almost over. Sell the May 680call for about $14 ($1400). This call will not require any additional margin or buying power since the jan2014 call offsets it..just like how common stock offsets a short call when you put on covered call positions.

Sell May 680call for $14

If on May opex is at 680 or lower you keep the $1400, at first glance you might think that break even is 694..for just this short call it is, but for the "position", using the Trademonster analyse tab, the breakeven is way up there, at 800 share price at may opex the "position" profit is $3000+. thats because the jan2014 call is gaining in profits offsetting the short call.

If stock is below 680 at opex your effectively have lowered your average price for that 2014 call. You can continue selling short calls, monthlies, or weeklies, do collars, put spread collars as you see fit around earnings as well.

The key for me on diagonals is that i will hold that 2014 call regardless of the day to day moves of the stock..just like when you say your aaple stock is a long term hold or a core position. so some months i keep all that short call premium, some months have to roll the short call up and out to next month. doesnt matter, since its a long term position, just cashing in on that premium every month like a dividend.

was going to say she likes her aaple iphone, but its just a camera..oh well..she probably like diagonal spreads.