Home › Forums › Open Trades › Scaling Calendar in AAPL
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September 14, 2016 at 10:11 am #6959Steven PlaceKeymaster
While the rest of the market is dragging, AAPL is up solidly on some sales numbers. Over the past 3 days it’s up 7.5%, which is statistically significant… it doesn’t happen very often.
My base case here is that the stock “rests” instead of pulling back hard. It has spent a lot of energy over the past 3 days and will hit an equillibrium level and go sideways for a few days.
The trade I like is a calendar:
Full Time Profits Order Ticket Type Asset Duration Strike C/P STO AAPL 21 Oct 16 110 Put BTO AAPL 18 Nov 16 110 Put Total Debit: 1.83 Now this may appear like poor risk reward, but that is because AAPL has earnings in the Nov cycle… that means you won’t see much time decay and that the position will end up better than what it looks like with your analytics.
If AAPL runs to 106 or 115 I will add to the trade.
- This topic was modified 6 years, 8 months ago by Steven Place.
- This topic was modified 6 years, 8 months ago by Steven Place.
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You must be logged in to view attached files.September 16, 2016 at 10:23 am #6977Steven PlaceKeymaster115 hit so adding another calendar…
Full Time Profits Order Ticket Type Asset Duration Strike C/P STO AAPL 21 Oct 16 115 Put BTO AAPL 18 Nov 16 115 Put Total Debit: 1.90 September 16, 2016 at 10:48 am #6979Steven PlaceKeymasterThis is what the current risk looks like:
Now I’d like to point out that this is very misleading. Option analytics have a very hard time with the term structure of the trade.
Allow me to explain this:
The October options have an implied volatility around 21%
The November options have an implied volatility of around 25%.
What’s going on?
Earnings for AAPL are in the November cycle. That means the term structure between the two months is very wide.
It also means that the November options will hold their premium up a lot better because the time premium will be replaced by event premium.
Option analytics assume that theta will act a certain way, and most of the time it’s right. But when we come into earnings, it changes and the theta is actuallyr educed.
So while the max reward seems tiny, it’s actually greater than what you see on the analytics.
September 21, 2016 at 9:54 am #6993Steven PlaceKeymasterHere’s what the trade looks like right now:
Again, this looks like terrible risk/reward because the “tent” of the calendars is so low.
But let’s look at the extrinsic value of the options… we’re going to combine each strike and just separate the duration:
Oct 115 + 110 extrinsic: 3.06
Nov 115 + 110 extrinsic: 6.98
Now here’s the thing… the analytics assume that theta will decay “normally”. The current greeks assume that the theta on both option durations will be the same.
But it’s not the case!
The oct options have an IV of 18%
The nov options have an IV of 25%
Because of earnings.
The Nov options will decay at a much slower rate on an absolute basis compared to the Oct options.
Because the Oct options don’t have earnings in the cycle.
So headed into the next few weeks, we should see the curve continue to improve compared to what it appears on the analytics software.
September 26, 2016 at 12:24 pm #7033Steven PlaceKeymasterGoing to take off this trade for a profit.
Full Time Profits Order Ticket Type Asset Duration Strike C/P BTC AAPL 21 Oct 16 115 Put STC AAPL 18 Nov 16 115 Put Total Credit: 2.25
Full Time Profits Order Ticket Type Asset Duration Strike C/P BTC AAPL 21 Oct 16 110 Put STC AAPL 18 Nov 16 110 Put Total Credit: 2.03 14% return on risk.
Now look– here’s the cool lesson I’ve been trying to teach on this trade.
Remember earlier how this trade looked like garbage on the analytics?
Here’s what it looks like now:
This is because the TERM STRUCTURE is changing because of earnings.
The October options are decaying more and the November options are decaying less than what the analytics were pricing in.
That’s because the November options continue to have TIME PREMIUM replaced by EVENT PREMIUM due to earnings.
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