In this issue, we update our market indicators along with a short strategy comment about closing hedge positions followed by some interesting new Apple Inc. (AAPL) suggestions from an experienced well-known contributing author.
Strategy
Since it most always retests important lows, we continue to think the S&P 500 Index (SPX) will retest the November 16 low at 1343.35. In the last year, there have been seven other meaningful declines – all retested within a few weeks. If this low volume advance continues without retesting it will be the exception. However, since the timing is uncertain there seems to be no reason to continue paying the cost of hedging.
For the record, we closed our 4 December hedges for an average loss of .35, with a low of .20 and a high of .57. Since they have long bias, we plan to hold the remaining 3 December positions until expiration.
iShares FTSE China 25 Index Fund (FXI)
On remarks by the new Communist Party leader Xi Jinping, FXI broke out above 38 and is now in a well-defined uptrend from the September 5 low at 32. Since FXI has good options volume, longer-term call spreads could work well.
Now for Apple
Last week we mentioned contacting other options strategist at the recent Traders Expo and extending invitations to contribute some new ideas.? Accordingly, we are extremely pleased to present some Apple ideas from Dan Sheridan, a well-known and respected options mentor and instructor for the CBOE.
Dan is a 22-year veteran CBOE market maker. Since leaving the pits in 2004, he has been teaching individual traders on the techniques and methods he used every day to consistently profit in the options markets. From Sheridan Mentoring he teaches professional and retail traders while hosting the weekly CBOE TV show Options safari at CBOE.com. He frequently presents educational webinars for the CBOE and many brokerage firms. Further, the CBOE sponsors the popular one-day “Real trading with Dan Sheridan” seminars across the country.
Apple Inc. (AAPL) – Three Trade Ideas
The personality of AAPL has changed quite a bit in the last 2? months. The stock is currently at $533, down 24% from its September 19 close of $702. During that same period, implied volatility has skyrocketed! Comparing at-the-money calls approximately 30 days from expiration, IV was 24 September 19 and today is currently at 39! Is it time to yell, “Sell Mortimer, Sell!” As in life as well as options, you can’t have your cake and eat it too! Implied volatility levels have exploded because the stock has declined and gyrated wildly with much speed. That is the key, implied volatility acts up much more when there is speed, especially on the downside. I think there may be a few opportunities in AAPL options depending on your price and implied volatility outlook over the next month.
Opinion #1: I think AAPL has found a bottom here and the stock will be a little less volatile and more range bound going into the holidays.
Strategy: Iron Condor – Buy 1 January 600 call, and Sell 1 January 570 call, then Buy 1 January 490 put and Sell 1 January 520 put. The total credit is $16.50 ($1650) while the total risk is $13.50 ($1350).
Rationale: If the IV decreases 2 points over the next 16 days, the price range, within 1 standard deviation would be roughly $503-$590. Within this range we could make anywhere from 2% to over 25% on our risk or margin. Outside of this range exit the trade for a small loss or adjust it. I would look to be out of this trade in 14-16 days looking for about 10-12% profit target. If the price moves under $503 or over $590, I would exit and live to play another day.
Opinion #2: I think the stock will rally into January earnings!
Strategy: Bullish Call Butterfly – Buy 1 January 560 call and Sell 2 January 580 calls, then Buy 1 January 600 call. The total debit is $2 ($200). The maximum loss is limited to cost of the butterfly, $200. The profit potential could reach over $1600 if we landed at the short strike of $580 on the January expiration.
Rationale: If I think the stock can rally into earnings, January implied volatility will decrease and this butterfly will really expand. During the life of the butterfly, we can get a very wide profit area. However, as we get towards expiration, it narrows. If the IV decreases even 1 point over the next 20 days, the butterfly can make between 20-70% between $540 and $627, excluding commissions. This is an extremely wide range. My plan would be to hold it no longer than 20 days and look for at least a 30% profit on my initial cost.
Second Strategy for opinion #2: Reverse Calendar – Buy 1 January weekly $535 call that expires on January 4 and sell 1 January $535 call, expiring January 18. The total credit is $5.20. I would only do this in a portfolio margin account, since in a normal Reg. T account the excessive margin requirement makes this trade much less desirable.
Rationale: This is similar to a long straddle in that we would make money if the stock moved away from the short $535 strike in either direction. The difference versus a long straddle is that we would benefit if the implied volatility decreased, which would probably happen on the upside. What we don’t want to happen is for the stock to hang around the short strike of $533, since it loses money. The way I would trade this is to take off the trade if it moves $30 in either direction. This is a more advanced speculative strategy and again, I would only trade this in a portfolio margin account.
The suggestions above use the closing middle price between the Friday bid and ask. Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
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Summary
While a retest of the November 16 low is overdue, there is no indication it is going to arrive any time soon. Accordingly, we are closing our hedge positions until we see the retest begin, which could be after the New Year or maybe after new “fiscal cliff” news. In the meanwhile, China appears to be trending higher.