Three weeks ago, we set up a special portfolio with a goal to make 100% on AAPL options in 4 weeks. We closed out the positions last Friday, a week early. We failed to reach our goal. The portfolio started out with a value of $4488 and after 3 weeks, it was worth $7172.
The gain for the 3 weeks was 60% (after commissions). Even though we failed in our initial goal, most of us were happy with making 60% in less than a month on our money.
For two years, Terry’s Tips has carried out at least one portfolio (and sometimes two) which use AAPL as the underlying, and we have noticed some patterns of stock price actions and option values that I would like to share with you today.
Lessons Learned Around the Apple New Product Announcement
AAPL has been a great underlying stock for Terry’s Tips subscribers. In April, 2010 (just under two years ago), we set up an actual brokerage account to trade options on AAPL. We started with $5000 in the account.
We maintained a bullish position in this portfolio because we liked the prospects for this company. Actually, it performed quite a bit better than we expected. Over the two years, whenever the portfolio value grew to over $10,000, we withdrew cash from it so that new Terry’s Tips subscribers who wanted to mirror the portfolio in their own account (or have trades made for them through the Auto-trade program at thinkorswim) could get started with $10,000.
A total of $13,000 was withdrawn from the portfolio over two years, and the account today is still worth more than $10,000, or double what subscribers started with. It works out to a gain of about 565% over the period.
We learned some things along the way. First, in the few weeks leading up to an announcement of earnings or a new product release, the stock tended to move higher. Once the announcement was made, the stock usually fell back a bit (market expectations seem to be greater than the reality).
There is an old saw in the market – “buy on the rumor and sell on the news,” and it seemed to prevail after the Apple announcements most of the time.
Last week, we expected a similar pattern once the news about the new iPad was announced. We added new spreads to our portfolio to provide downside protection in case the pattern continued (we bought new calendar spreads at strike prices well below the current price of the stock). These spreads ultimately lost money when the stock did not fall this time around. At one point shortly after the announcement, it did fall by almost $30 but quickly reversed itself.
In spite of this experience, we expect that in future AAPL announcements, such as the quarterly earnings announcement due near the end of April, we plan to add downside protection once again.
The second big pattern we noticed concerned the option prices around announcement time. Leading up to the announcement, option prices soared. The implied volatility of the March options got up to 40, and fell all the way to 25 after the announcement. In the experimental portfolio we started with $4488, we had used Weekly Mar2-12 as the long side, and these prices collapsed after the announcement. The portfolio lost money for the week.
In our other AAPL portfolio, the one we have been running for almost 2 years, our long positions were in further-out months, and these option prices did not collapse. As a result, this portfolio gained 11% for the week (even though we had placed some downside protection spreads in it as well).
In future announcement periods, we intend to use longer-term call options as the long side to avoid the collapse of shorter-term option prices once the announcement has been made, even though those options are quite a bit more costly.
We have made 3 short videos which explain the 3-week results of the special shorter-term portfolio (which we have now closed down and replaced with a new set of AAPL options). If you have not already seen these videos, you might check them out.
The original positions were set out in an actual account carried out at Terry’s Tips. The YouTube link is http://youtu.be/6J9KPuimyXk
The portfolio was updated in the Week 2 video –
And finally, adjustment trades we made were displayed in this little video –
http://youtu.be/YC3d2NuX2MI Be sure to enlarge it to full-screen mode so you can see the numbers.
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Any questions? I would love to hear from you by email (firstname.lastname@example.org), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips (including the two AAPL-based portfolios) and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
I look forward to having you on board, and to prospering with you.