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Posts Tagged ‘AAPL’

How to Make 60% to 100% in 2014 if a Single Analyst (Out of 13) is Right

Monday, November 25th, 2013

Today we are going to look at what the analysts are forecasting for 2014 and suggest some option strategies that will make 60% or more if any one of the analysts interviewed by the Wall Street Journal are correct. They don’t all have to be correct, just one of the 13 they talked to.

Please continue reading down so you can see how you can come on board as a Terry’s Tips subscriber for no cost at all while enjoying all the benefits that thinkorswim by TD Ameritrade offers to anyone who opens an account with them.

Terry
 
How to Make 60% to 100% in 2014 if a Single Analyst (Out of 13) is Right 

 
Now is the time for analysts everywhere to make their predictions of what will happen to the market in 2014.  Last week, the Wall Street Journal published an article entitled Wall Street bulls eye more stock gains in 2014.  Their forecasts – ”The average year-end price target of 13 stock strategists polled by Bloomberg is 1890, a 5.7% gain … (for the S&P 500).  The most bullish call comes from John Stoltzfus, chief investment strategist at Oppenheimer (a prediction of +13%).”
The Journal continues to say “The bad news: Two stock strategists are predicting that the S&P 500 will finish next year below its current level. Barry Bannister, chief equity strategist at Stifel Nicolaus, for example, predicts the index will fall to 1750, which represents a drop of 2% from Tuesday’s close.”
I would like to suggest a strategy that will make 60% to 100% (depending on which underlying you choose to use) if any one of those analysts is right. In other words, if the market goes up by any amount or falls by 2%, you would make those returns with a single options trade that will expire at the end of 2014.
The S&P tracking stock (SPY) is trading around $180.  If it were to fall by 2% in 2014, it would be trading about $176.40.  Let’s use $176 as our downside target to give the pessimistic analyst a little wiggle room.  If we were to sell a Dec-14 176 put and buy a Dec-14 171 put, we could collect $1.87 ($187) per contract.  A maintenance requirement of $500 would be made.  Subtracting the $187 you received, you will have tied up $313 which represents the greatest loss that could come your way (if SPY were to close below $171, a drop of 5% from its present level). 
Once you place these trades (called selling a vertical put spread), you sit back and do nothing for an entire year (until these options expire on December 20, 2014). If SPY closes at any price above $176, both puts would expire worthless and you would get to keep $187 per contract, or 60% on your maximum risk. 
You could make 100% on your investment with a similar play using Apple as the underlying.  You would have to make the assumption that Apple will fluctuate in 2014 about as much as the S&P.  For most of the past few years, Apple has done much better than the general market, so it is not so much of a stretch to bet that it will keep up with the S&P in 2014.
Apple is currently trading about $520.  You could sell at vertical put spread for the January 2015 series, selling the 510 put and buying the 480 put and collect a credit of $15.  If Apple closes at any price above $510 on January 17, 2015, both puts would expire worthless and you would make 100% on your investment.  You would receive $1500 for each of these spreads you placed and there would be a $1500 maintenance requirement (the maximum loss if Apple closes below $480).
Apple is trading at about 10 times earnings on a cash-adjusted basis, is paying a 2.3% dividend, and is continuing an aggressive stock buy-back campaign, three indications that make a big stock price drop less likely to come about in 2014.
A similar spread could be made with Google puts, but the market is betting that Google is less likely to fall than Apple, and your return on investment would be about 75% if Google fell 2% or went up by any amount.  You could sell Jan-15 1020 puts and buy Jan-15 990 puts and collect about $1300 and incur a net maintenance requirement of $1700 (your maximum loss amount).
If you wanted to get a little more aggressive, you could make the assumption that the average estimate of the 13 analysts was on the money, (i.e., the market rises 5.7% in 2014).  That would put SPY at $190 at the end of the year. You could sell a SPY Dec-14 190 put and buy a Dec-14 185 put and collect $2.85 ($285), risking $2.15 ($215) per contract.  If the analysts are right and SPY ends up above $190, you would earn 132% on your investment for the year.
By the way, you can do any of the above spreads in an IRA if you choose the right broker.  I would advise against it, however, because your gains will eventually be taxed at ordinary income rates (at a time when your tax rate is likely to be higher) rather than capital gains rates.
Note: I prefer using puts rather than calls for these spreads because if you are right, nothing needs to be done at expiration, both options expire worthless, and no commissions are incurred to exit the positions.  Buying a vertical call spread is mathematically identical to selling a vertical put spread at these same strike prices, but it will involve selling the spread at expiration and paying commissions.
What are the chances that every single analyst was wrong?  Someone should do a study on earlier projections and give us an answer to that question.  We all know that a market tumble could come our way if the Fed begins to taper, but does that mean the market as a whole would drop for the entire year?  Another unanswerable question, at least at this time.
On a historical basis, for the 40 years of the S&P 500’s existence (counting 2013 which will surely be a gaining year), the index has fallen by more than 2% in 7 years.  That means if historical patterns continue for 2014, there is a 17.5% chance that you will lose your entire bet and an 83.5% chance that you will make 60% (using the first SPY spread outlined above).  If you had made that same bet every year for the past 40 years, you would have made 60% in 33 years and lost 100% in 7 years.  For the entire time span, you would have enjoyed an average gain of 32% per year.  Not a bad average gain.

Follow-Up on AAPL Earnings-Announcement Strategy

Wednesday, November 6th, 2013

Last week I told you about a spread I had placed on Apple (AAPL) just prior to their earnings announcement. I closed out that spread this week, and there was a learning experience that I would like to share with you.

Please continue reading down so you can see how you can come on board as a Terry’s Tips subscriber for no cost at all while enjoying all the benefits that thinkorswim incentive offers to anyone who opens an account with them.

Terry

Follow-Up on AAPL Earnings-Announcement Strategy: Last Monday, prior to AAPL’s earnings announcement, I bought a diagonal spread, buying Jan-14 470 calls and selling the weekly Nov1-13 525 while the stock was selling just about $525. I made this trade because I felt good about the company and believed the stock might move higher after the announcement. As it worked out, I was wrong.

I paid $62.67 for the Jan-14 470 call and sold the Nov1-13 525 call for $17.28, shelling out a net $45.39 ($4539) for each spread. (Commissions on this trade at thinkorswim were $2.50). The intrinsic value of this spread was $55 (the difference between 525 and 470) which means if the stock moved higher, no matter how high it went, it would always be worth a minimum of $55, or almost $10 above what I paid for it. Since the Jan-14 calls had almost three more months of remaining life than the Nov1-13 calls I sold, they would be worth more (probably at least $5 more) than the intrinsic value when I planned to sell them on Friday.

So I knew that no matter how much the stock were to move higher, I was guaranteed a gain on Friday. If the stock managed to stay right at $525 and the Nov-1 525 call expired worthless (or I had to buy it back for a minimal amount), I stood to gain the entire $17.28 I had collected less a little that the Jan-14 call might decay in four days.

In the after-hours trading after the announcement, the stock shot up to the $535 area and I was feeling pretty good because I knew I was assured of a profit if the stock moved higher. However, the next morning, it reversed direction and traded as low as $515. I wasn’t feeling so great then, although I still expected to make a profit (albeit a smaller one).

On Thursday, the stock rose to about $525, just where it was when I bought the spread on Monday. There was still $2.50 of time premium remaining in the Nov1-13 call which I had sold, so I was tempted to wait until it was due to expire the next day so I might pick up another $250 per spread when I sold it. However, I decided to sell it at that time.

I sold the spread for $56.25, gaining $10.86, or $1076 per spread which had cost me $4539 on Monday. That worked out to a 21% gain for the four days.  I was happy with that result.

On Friday, AAPL fell back to about $517 at the close. The spread that I had sold for $56.25 was trading at about $53. I still would have made a profit, but it would have been much lower than the one I took on Thursday.

The lesson here is that when the stock is trading very near the strike price of your short call when you have a spread like this (either a diagonal or a calendar spread), it is a good idea to sell it rather than waiting until expiration day of the short option. While you give up some of the potential gain if the stock were to remain absolutely flat, you risk doing worse if the stock were to move more than moderately in either direction.

It is better to sell your diagonal spread whenever the strike price of your short option is very close to the strike price rather than waiting until the last minute to try to squeeze out every penny of decay that might be there. In this case, I was wrong about the stock moving higher – it fell about $10 and I still made over 20% on my investment for a single week.

An AAPL Earnings-Announcement Strategy

Wednesday, October 30th, 2013

Today I would like to share with you an options investment I made yesterday, just prior to the Apple (AAPL) earnings announcement. While it is too late to make this same investment yourself, you might consider it three months from now when announcement time comes around again, or with another company that you feel good about.

Please continue reading down so you can see how you can come on board as a Terry’s Tips subscriber for no cost at all while enjoying all the benefits that thinkorswim incentive offers to anyone who opens an account with them.

Terry

 

An AAPL Earnings-Announcement Strategy: Approximately every 90 days, most public companies announce their latest quarterly earnings. Just before the announcement day, things get interesting with option prices. Since stocks often make big moves in either direction once earnings (and other numbers such as gross sales, margins, and future guidance) are announced, option prices get quite expensive, both for puts and for calls.

For people who like to collect high option premiums (i.e., selling expensive options to someone else), this pre-announcement period seems like a great opportunity provided I have a feeling one way or the other about the company. I had a good feeling about AAPL this month. I wasn’t sure what earnings might be (beware of anyone who says he is sure), but I thought the company was fairly priced, and I think the huge stash of cash they are sitting on provides some protection against a large drop in the stock price.

When a situation like this occurs (where I like a company and earnings are about to be announced), one of my favorite strategies is to buy a deep in-the-money call on the company, a call that has a few months of remaining life, and sell an at-the-money call in the shortest-term option series that expires after the announcement day.

On Monday morning, AAPL was trading about $525. I bought a diagonal spread, buying Jan-14 470 calls and selling Nov1-13 525 calls (AAPL has weekly options available, and the Nov1-13 calls would expire on Friday, November 1st , four days after the announcement after the close on Monday.

I paid $62.67 for the Jan-14 470 call and sold the Nov1-13 525 call for $17.28, shelling out a net $45.39 ($4539) for each spread. (Commissions on this trade at thinkorswim were $2.50). The intrinsic value of this spread was $55 (the difference between 525 and 470) which means if the stock moved higher, no matter how high it went, it would always be worth a minimum of $55, or almost $10 above what I paid for it. Since the Jan-14 calls had almost three more months of remaining life than the Nov1-13 calls I sold, they would be worth more (probably at least $5 more) than the intrinsic value when I planned to sell them on Friday.

So I knew that no matter how much the stock were to move higher, I was guaranteed a gain on Friday. If the stock managed to stay right at $525 and the Nov-1 525 call expired worthless (or I had to buy it back for a minimal amount), I stood to gain the entire $17.28 I had collected less a little that the Jan-14 call might decay in four days. A flat market would net me about a 36% gain on my investment, and any higher price for AAPL would result in at least a 25% gain.

After a company makes its announcement, all option prices tend to fall, especially in the shortest-term series that expires just after the announcement. However, deep in-the-money options like the one I bought derive most of their value from being so deep in the money, and they generally do not fall nearly as much as shorter-term, nearer-the-money options.

On the downside, the stock could fall at least $20 before I would incur a loss. Since the delta of the Jan-14 470 call was 80, if the stock fell $20, my long call might fall about $16 ($20 x .80). That would still be less than the $17.28 I collected from the 525 which would expire worthless so I would still make a gain.

Actually, as the stock falls in value, delta for an in-the-money call gets lower, and the Jan-14 call would fall by less than $16. The stock could probably go down at least $25 before I lost money with my original spread.

In the event that AAPL fell over $25 so I lost some money on the spread, since I like the company and it is now trading for only $500, I might want to hang onto my 470 call rather than selling it on Friday. I might sell another 525 (or other strike) call with a few weeks of remaining life, reducing my initial investment by that amount.

I like to make an investment that could make 25% or more in a single week if a company I like stays flat or goes higher by any amount after an announcement, and the stock can fall about 10% and I still make a gain. A more conservative investment would be to sell an in-the-money call rather than an at-the-money call. While the potential maximum gain would be less, you could handle a much greater drop in the stock value before you entered loss territory on the downside.

Two Earnings Play for This Week – Deere and Sina

Monday, May 13th, 2013

 The Green Mountain Coffee Roasters (GMCR) spread I recommended last week resulted in a 20% gain.  Not bad considering we were blindsided by their announcing a new 5-year deal with Starbucks that shot the stock 25% higher while we were betting on a lower post-announcement price.  Our gain was not as great as last week’s 50% gain on Apple, but we will take 20% anytime (I’m sorry, but I executed the Apple spreads in a Terry’s Tips portfolio and did not share it with the free newsletter subscribers).

 

 

 

This week I have two earnings-related plays which need to be made before the close on Wednesday if you want to participate.

 

 

 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

 

 

Terry

 

 

 

Two Earnings Play for This Week – Deere and Sina

 

 

 

Sina Corporation (SINA) is pretty much the same as Yahoo but operates in China.  I have written a Seeking Alpha article about the company – How To Play The Sina Corporation Earnings Ann… in which I explain why I believe that the stock will probably dip a bit after Wednesday’s announcement (largely because expectations are high, the current valuation is pricey, and hedge funds are selling shares).

 

 

 

I recommended these trades to play the SINA announcement with the stock at about $59:

 

 

 

BTO 10 SINA Jun-13 55 puts (SINA130622P55)

 

STO 10 SINA May-13 55 puts (SINA130518P55) for a debit of $1.01  (buying a calendar)

 

 

 

BTO 10 SINA Jun-13 57.5 puts (SINA130622P57.5)

 

STO 10 SINA May-13 57.5 puts (SINA130518P57.5) for a debit of $1.11  (buying a calendar)

 

 

 

BTO 10 SINA Jun-13 60 calls (SINA130622C60)

 

STO 10 SINA May-13 60 calls (SINA130518C60) for a debit of $1.18  (buying a calendar)

 

 

 

These trades should make a gain if the stock goes up by less than 5% or down by less than 10% by Friday at the close.

 

 

 

The other earnings play involves Deere & Co. (DE) which has the unenviable record of falling four straight quarters after announcing, even when they bested expectations.  I have also written a Seeking Alpha article on this play – How To Play the Deere & Company Earnings Announcement.

 

 

 

Expectations are high here, too, and I expect a lower price than the current $93 after earnings.  Here are the spreads I am making in Deere:

 

 

 

Buy To Open 10 DE Jun-13 95 puts (DE130622P95)

 

Sell To Open 10 DE May-13 92.5 puts (DE130518P92.5) for a debit of $2.35  (buying a diagonal)

 

 

 

Buy to Open 5 DE Jun-13 90 puts (DE130622P90)

 

Sell to Open 5 DE May-13 90 puts (DE130518P90) for a debit of $.90  (buying a calendar)

 

 

 

These spreads will do well if the stock falls but start to lose money if the stock moves more than $2 higher.

 

 

 

Please check both Seeking Alpha articles for my complete reasoning for these spreads as well as a risk profile graph for each.

 

A Possible Earnings Play for This Week

Monday, April 29th, 2013

Last week I suggested that you “purchase May – Apr4 calendar spreads on AAPL at the 410 and 420 strikes, paying $3.85 and $3.75 for them in hopes that AAPL moves higher than its $390 price that it closed at Friday.”  We did just that in a Terry’s Tips portfolio.

 

The stock did manage to move up and we sold these spreads early on Friday for $6.86 and $4.66.  We sold early because we had such a good gain and because Fridays are usually weak for AAPL (people tend to sell Weekly call premium on that day and depress the stock price).  A lower price would have resulted in a lower gain because all of our strikes were higher than the stock price.  The stock managed to move up by $8 after we closed out the spreads, and we would have done considerably better if we had waited (but taking a sure profit is our preference, and we shouldn’t look back – it only hurts).

 

Our gain on the spreads worked out to be 50% after commissions.  We will take that any week.

 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

Terry

 

A Possible Earnings Play for This Week

 

Questor Pharmaceuticals (QCOR) is an interesting company which suffered a huge setback in September 2012 when an insurance company which handled 5% of the company’s claims decided that it would no longer cover the expensive drug that represents essentially all of QCOR’s sales.

 

Since that time there have been no other insurance companies to deny coverage, and many institutional investors and hedge funds have purchased stock recently, presumably after surveying other insurance companies to learn if they had any intention to do so.  In contrast to that bullish event, over the past two weeks, short interest has increased by 3.1 million shares to 27 million while the outstanding float is only 54 million.  In other words, shares sold short represent 50% of the float.  Clearly, some people are hoping that other insurance companies will deny coverage and the stock will tank once again.

 

For many reasons, QCOR seems to be a screaming buy.  It has been growing at a good rate, carries a forward P/E of only 5, has no debt, and has multiple consecutive quarters of top line and bottom line analyst beats.  In my opinion, if earnings beat estimates once again, a short squeeze might send the stock considerably higher.

 

The stock has fallen about 22% over the past month, an indication that expectations are not exceptionally high (although it has recovered about 8% in the past week).  I believe there is a strong chance that it will trade higher after the announcement, and plan to make the following trades just before the close on Tuesday (earnings will be announced after the close on that day):

 

Buy To Open 10 QCOR May1-13 27 calls (QCOR130503C27)

Sell To Open 10 QCOR May1-13 32 calls (QCOR130503C32) for a debit of $2.30  (buying a vertical)

 

Buy to Open 10 QCOR Jun-13 30 calls (QCOR130622C30)

Sell to Open 10 QCOR May1-13 30 calls (QCOR130503C30) for a debit of $1.50  (buying a calendar)

 

This is what the risk profile graph looks like if we assume that implied volatility (IV) of the June options falls by 15 (from 65 to 50) after earnings are announced:

 

QCOR Risk Profile Graph

 QCOR Risk Profile Graph

 

These positions will cost about $4500 to place.  If the stock stays flat, a small gain should result.  If it moves higher by any reasonable amount, a larger gain should come our way.  However, if the stock falls more than just a small amount, a loss would result.

 

I feel good enough about this company to take this bullish position for Tuesday’s earnings announcement.

Apple’s Fundamental Great Value May Soon Get a Gigantic PR Boost

Tuesday, February 12th, 2013

Apple’s Fundamental Great Value May Soon Get a Gigantic PR Boost

Apple (AAPL) has become one of the least expensive stocks in the entire market based on a fundamental value.  Subtracting out its $128 per-share cash value ($121.3 billion/939 million shares outstanding), its trailing P/E is a ridiculously-low 7.9.  Even if you do not adjust for cash, the trailing P/E is 10.88 and forward P/E is 9.43 according to Yahoo Finance.

The company pays a 2.2% forward dividend rate and the pay-out ratio is only 12% so there is an excellent chance that this will increase in the future or some other cash-distribution method such as the preferred stock proposal advanced by hedge fund manager David Einhorn is instituted.

The only way that such a low valuation could be justified would be if the growth rate slowed dramatically.  Surely, it will fall significantly from the nearly 50% growth numbers  that it has sported for the last five years, but the culture of this company is to continually come up with new products which will appeal to its growing base of satisfied customers, and it has barely scratched the potential in China (where Tim Cook said would be their largest market).  This year Apple will probably seal a deal with China Telecom (CHA), the largest mobile carrier by far in the world.

Here are the YOY growth rates over the past five years:

aapl graph YOY quarterly growth

aapl graph YOY quarterly growth

 

 Admittedly, the current growth rate is the absolute lowest that it has been for the past five years, but look what happened in November 2009 when it was at a similarly low level. The growth rate really took place from that point. Will history repeat itself? According to Zacks Investment Research, analysts expect the Apple’s growth rate in 2014 tooo be 15.30%.

When a company’s future growth rate is less than its cash-adjusted P/E, it should be considered to be a fundamental bargain. That is precisely where AAPL is right now.

There is also a potential technical indicator justification for buying the stock at this time: 

AAPL 50 Day Moving Average

AAPL 50 Day Moving Average 

One of the smartest investing decisions you could have made over the past year was to buy AAPL when it rose above the 50-day moving average and sell it when it fell below that moving average.  This strategy would have picked up the big upward move from late June to October and also picked up the huge drop since that time. 

If you check out the slope of the most recent stock price move as well as the 50-day average, you can see that they are on a collision course to cross over one another in the next two weeks.  This might be the perfect time to get in ahead of this important technical indicator before it actually kicks in.  Even if you don’t believe in technical analysis, there are so many people out there who do believe in it that it becomes a self-fulfilling prophecy once it is triggered. 

In addition to both fundamental and possible technical reasons the AAPL is undervalued at its current price, there is the possibility that a public relations coup of epic proportions might be on its way on this very day. 

On December 6, 2012, Apple (AAPL) CEO Tim Cook announced that his company would shift manufacturing of one computer line from Asia to the United States. “Next year we are going to bring some production to the U.S. on the Mac,” Cook told Bloomberg Businessweek. “We’ve been working on this for a long time, and we were getting closer to it. It will happen in 2013. We’re really proud of it. We could have quickly maybe done just assembly, but it’s broader because we wanted to do something more substantial.” 

The announcement was generally discounted as a symbolic effort to improve its public image which has been tarnished in recent years by reports of labor issues at Foxconn, its major contract supplier in China. 

At the time of his announcement, AAPL was trading at $534, or about 10% lower than it closed today Monday, February 11th ($480). Over this same time period, the S&P 500 has gained almost 7%.   Clearly, a more positive public image doesn’t necessarily result in a higher stock price, at least all by itself. 

Analysts expected the amount of production that would be shifted to the United States to be negligible.  Cook stated that they would invest $100 million to ramp up to make Mac computers, a pittance compared to the $121 billion in cash they are sitting on (and which has been the source of multiple suggestions lately on how they can best use this stash). 

But symbolically, if a huge company like Apple shifts some manufacturing jobs to the U.S., joining recent moves by Caterpillar (CAT) and General Electric (GE), and other large companies (according to a Boston Consulting Group survey ), maybe more others might join the party and collectively reduce our unemployment rate that unhappily hovers around 8% these days. 

There seems to be a nationwide movement to “buy local.”  While this usually refers to locally-grown fruits, vegetables and meat products, “buy American” has been a long-standing slogan in our country.  Maybe Apple will figure out that the extra cost of hiring U.S. workers for some manufacturing jobs adds to the bottom line because certain segments of the population will reward them by buying their products rather than Samsung’s. 

It seemed unusual to me that an oft-repeated tag line scrolling across the TV screen on CNN today was that Apple’s Tim Cook would be at President Obama’s State of the Union Address.  There undoubtedly will be dozens of other more important “real” celebrities in attendance, but why did Tim Cook get all the publicity? 

Could it be possible that Mr. Obama will publicly recognize Tim Cook’s promise to return manufacturing jobs to the United States, and give some specifics of how many people might be employed or where the new factories might be located?  Maybe Mr. Cook will be appointed to head up a commission of other large domestic company CEOs to encourage other companies to join the movement to bring back jobs to America. 

Maybe the President will announce that Apple will be making the iWatch using Corning Glass in New York rather than Zhengzhou, or some other positive news which might reflect well on Apple as well as our nation. 

Will such publicity goose up the stock?  It didn’t when the initial announcement was made in December.  But maybe this time it will be different.  An interview on Bloomberg Businessweek is a fairly commonplace event, but a company being recognized in a State of the Union Address is something serious and potentially beneficial to a company whose luster has faded as the stock has plummeted from a high over $700 a few months ago to $480 today.

 

Closing out the APPLE Pre-Earnings Spreads

Friday, January 25th, 2013

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.

A Remarkably Safe Way To Play The Apple Earnings Announcement

Tuesday, January 22nd, 2013

Apple announces earnings Wednesday after the close and I have come up with a strategy that looks like it can make a decent gain for the week (ranging from 5% to 15%) with almost no chance of incurring a loss. 

The big downside of the strategy is that it requires an investment of about $16,000.  I understand that many subscribers are looking for less costly option investments.

 However, if you can afford an investment of this size, check out the Seeking Alpha article I wrote just yesterday. 

Terry 

Here is the link – A Remarkably Safe Way To Play The Apple Earnings Announcement 

This is the third week in a row that I have offered a strategy centering on the unusually-high option prices in the series that expires just after an earnings announcement. 

The first play was for Wells Fargo – How to Play the Wells Fargo Earnings Announcement for Tomorrow.  This one gained 44% after commissions. 

The second play involved eBay – How to Play the EBAY Earnings Announcement.  I waited too long to close out my spreads this time around (many subscribers gained 24% or more).  But I did manage to make 11.6% after commissions, still not a bad week. 

I think this week’s earnings-announcement play is the safest one yet in spite of the high cost  requirement.  I am also sharing with paid subscribers a most promising play in Starbucks (SBUX).

Six consecutive successful Apple option plays, and more still to come?

Wednesday, January 2nd, 2013

Three weeks ago I wrote an article about how to play the unusual stock action pattern of Apple (AAPL). – Play Apple Volatility With A Unique Weekly Options Strategy

For some unclear reason (most likely options-related, at least to my way of thinking), AAPL tends to fall on Fridays, often quite dramatically, and to move higher on Mondays.

At that time, I suggested that buying at-the-money puts Thursday near the close (or shortly after the open on Friday) would often result in extraordinary gains if you sold the puts near the close on Friday.  For the past three weeks, this pattern has continued in spades.

The stock fell on Friday in those three weeks by $19.90, $2.40, and $5.47.  Since at at-the-money put with a single day of remaining life would cost about $4, your average gain over these three weeks works out to more than 150% per week.  During these three weeks, greater gains were possible by buying the puts before the close on Thursday rather than after the open on Friday (in the prior 12-week test, the stock often opened up a bit higher on Friday, suggesting that might be a better entry point).

The results for Mondays were not as dramatic, but still quite impressive.  Of course, buying an at-the-money call either Friday near the close or near the open on Monday would cost closer to $10 because there would be five trading days remaining rather than only one, so the initial cost of the option would be about double the amount required to buy puts in anticipation of the Friday drop.

Over the last three weeks, on Mondays, AAPL has moved higher by $9.04, $.84, and $22.58.  Substantial gains would have come your way in two of the three weeks with probably a break-even in the week when the stock budged up only $.84.

Will this Friday-Monday pattern continue?  No one knows, for sure.  My experience is that trading patterns identified by back-testing do not always hold up going forward.  But somehow this one seems different.  Until the pattern is broken, at least buying puts near the close on Thursday seems like a good bet.  Even if you lose the entire bet on occasion, there have been so many Fridays when the drop has been substantial, over time, the returns could have been extraordinary.

At heart, I am not an option buyer.  I prefer collecting decay from selling short-term options (using longer-term options as collateral rather than stock).  But for many months now, the daily and weekly fluctuations in AAPL have been considerably higher than the implied volatilities of the options would suggest.  As long as this pattern persists, buying AAPL options rather than selling them seems be in order, especially when there us some reason to believe that buying a put or call (rather than a straddle or strangle) gives you an edge.  The Friday-Monday phenomenon might just be the edge you need.

The Perfect Way to Play the Apple Earnings Announcement

Monday, December 24th, 2012

Apple (AAPL) options continue to fascinate me.  Today I would like to discuss a set of calendar spreads designed to capitalize on the escalating AAPL option prices that will come into play when Weeklys which expire just after the January earnings announcement become available. Those Weeklys will come on the scene on the Thursday before the January 2013 options expire the next day.

Check it out.

The Perfect Way to Play the Apple Earnings Announcement

Apple (AAPL) is due to announce earnings on January 22, 2013 (although this is currently unconfirmed). A year ago they announced earnings on Tuesday, January 24, 2012 just after the monthly options expired. The January 22, 2013 date would be consistent with that pattern. Of course, this is the big quarter when iPhone 5 and the iPad Mini results will be known for the first time.

A year ago the market responded favorably to the announcement and the stock moved $26 higher on the news (and then continued to move up more slowly for several months).

Who knows what will happen this time around?  I sure don’t, although I expect it will be higher than it is today.  I have devised a strategy for those of us who really don’t know where Apple will end up a month from now. 
My strategy is fully explained in a Seeking Article I published yesterday -

The Perfect Way to Play the Apple Earnings Announcement

The key thing to remember here is to buy calendar spreads at a variety of strike prices to increase the odds that the stock ends up near one of those strikes during the second half of January.

Happy trading.

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

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