Closing out the APPLE Pre-Earnings Spreads

The AAPL crash after the earnings announcement surely hurt a lot of people big-time (several people had commented that just buying calls was the smart way to approach the announcement, and others said they were selling out-of-the-money puts to be more “conservative” – they are the ones who got hurt the most – at least the call buyers only lost their entire investment).

 If you recall, in my Seeking Alpha article entitled A Remarkably Safe Way To Play The Apple Earni…  I recommended buying one AAPL Apr-13 500 straddle and selling one Jan4-13 500 straddle to take advantage of the huge difference in IV between them (April = 34, Jan4-13 = 76).  In addition, I said to buy two Apr-13 500 straddles to protect against a large move in AAPL in either direction. 

The difference between the first two straddles came up to $2900, and the extra two straddles cost $6500 each (I actually got better prices than these, but let’s go with the numbers I used in the article). 

I waited until Friday about noon to close out the positions.  AAPL had fallen all the way to $440, down about $60 since I placed the spreads, and $75 from where it had closed just before the announcement. 

I closed out the long and short straddles by selling both the  puts and calls as a calendar spread, collecting $570 for the calls and $750 for the puts.  So I lost money on those spreads (cost $2900, sold for $1320, lost $1580). 

The extra two straddles were sold for $7350 each ($14,700 total) compared to the $13,000 cost for a gain of $1700.  Bottom line, after paying $15 in commissions, I eked out a gain of $105 for the day. 

I consider myself lucky, especially waiting until Friday to close it out (the stock fell another $10 by the time I sold so I did better with the extra straddles than I would have done closing out on Thursday).  

I suspect that my small gain was a whole lot better than most option-players experienced this earnings week (I surely did a whole lot worse in many of my other spreads, most calendars at higher strike prices than $500 – all of which lost big time).

It ended up being one of the worst weeks ever for me, in fact. 

The biggest reason that the “remarkably safe” positions I  recommended  did not do anywhere near what the risk profile graph had suggested the spreads might gain was because IV of the April options fell far more than I expected.  Before the announcement, IV was 34, lower than any other option month.  After the announcement, IV tumbled to 29.  The at-the-money straddle would cost $4900 to buy compared to the almost $6500 that I paid for the April at-the-money straddle a couple of days earlier. 

The at-the-money Feb1-13 440 straddle with a week to go until expiration (as I write this with AAPL at $440) could be sold for $1730 or just about half what the at-the-money straddle with a week of remaining life could be been sold for prior to  the announcement. 

In conclusion, it is important not to get too excited about the risk profile graphs that get created before an earnings announcement (unless your software allows you to set an expected IV of the longer-term options). 

The inevitability of all option prices falling dramatically after the earnings announcement makes calendar and diagonal spreads difficult to execute profitably at the time.