Update on Last Week’s Apple Trade

Last week I recommended an options spread on AAPL prior to its earnings announcement on Tuesday.   The spread would have made money if the stock fell, remained the same, or rose moderately.  The only scenario where a loss would take place was if it shot considerably higher.

I believed that since the stock had already gone up $50 over the last month, much of the expected earnings blow-out had already been priced into the stock.

I was wrong, and the stock soared about $40 on the announcement.  Today I would like to discuss what we did about it.

Update on Last Week’s Apple Trade

If you missed last week’s trade, this is what it was:

Buy to Open 1 AAPL Feb-12 440 call (AAPL120218C440)
Sell to Open 1 AAPL Jan4-12 435 call (AAPL120127C435) for a debit of $1.05  (buying a diagonal)

The stock shot up to about $452 on Friday.  We had to buy back the Jan4-12 435 for about $17 ($1700).  We retained the Feb-12 440 call, and sold a Feb1-12 450 call, collecting $3 ($300).

This left us with a diagonal spread that will be worth a minimum of $1500 if the stock ends up any higher than $450.  We could earn more than that if it stays flat or moves slightly higher so we can sell more premium in the next two weeks.

With the stock up again this morning, we have recovered about $300 of our loss.   Here is what the risk profile graph looks like with our current positions:

The graph shows that in the next 4 days we should recover up another $400 or so if the stock stays above $450 (it is trading about $452 right now).  We have the opportunity to sell new Weeklys against the Feb-12 435 call for the next two weeks, so additional gains could easily come our way.  We have a very good chance of covering our loss from last week’s trade.

I apologize that this graph (and our manner of contending with a bad trade) is confusing.  Unless you are familiar with option trading, it should be confusing.  I hope you will continue receiving this free newsletter anyway.  Other reports should make more sense to you.

In spite of having 3 of last week’s suggested trades in our actual Terry’s Tips AAPL portfolio, the portfolio gained 25% last week and is now up 170% since we started the portfolio 20 months ago.  This is more than 2 ½ times as great as AAPL has gone up over this period, proving once again that an options portfolio can seriously outperform the outright purchase of stock (if you pick a stock that goes up).

Happy trading.