7.6 C
New York
Thursday, March 28, 2024

Comment by phil

View Single Comment

  1. phil

    Good morning! 

    If you think we're manipulated, check out Japan into their close:

    That's got our Futures, and Europe's futures up about 0.25% as Abe dissolves Parliament to call for elections with the presumption that he will be able to stack the deck with even MORE DOVEISH yes-men than he already has.  If, on the other hand, the people reject Draghi and strengthen his opposition, we'll see the rug pulled out from the Japanese economy. /NKD bottomed out at 17,130, back to 17,350 now.  

    And, of course, the big news was:

    AAPL/Taihu – No, you weren't clear and still not clear since you still haven't said what strike you have but, based on $50 and 2016, I'll assume you have the $65.71 calls (now $50.85).  If your basis is $14.16, congrats, that's a lovely $513,660 gain to lock in and collaring that (delta 0.90) with short April $125s at $4 (delta 0.34) and long April $110 puts at $4.65 (delta 0.34) does lock in $110 for a cost of 0.64 but AAPL is at $116.30 so you still risk losing $6.94, or 90% of it, which is still $87,444, which is almost 20% of your gains – may as well cash out and pay taxes if that's the case.

    If April is your tax selling date, then at least April makes sense but, if not, I have no idea why you would only protect until then.  Going back to my same logic as before but adjusting to April, you can sell the $95 calls for $22.50 and buy the $137.14 puts for $22.60 and now you will be called away at $95 with a $29.29 profit plus the $22.50 in your pocket is $51.79 and you can spend $1.12 on the $95 puts to lock in that minimum so you net $50.67 vs $50.85 your calls are worth right now, so that way you are only spending 0.18 ($2,520) to lock in $511,140 worth of gains (0.5%), that's a lot better than risking a 20% loss, isn't it?  

    By the way folks, if you want to have Taihu's tax problems 2 years from now, you can still buy the AAPL 2017 $90/120 bull call spread for $15.83, despite AAPL's big run up.  That's the good and bad thing about bull call spreads – they don't move much until they get close to expiration (unless you go way in the money).  

    The short $90s, unfortunately, have dropped to $7.80 (from $10) so the net of the trade is now $8 with the short puts but I think spending just the $15.83 on a $30 spread that's $26 in the money is a pretty good deal by itself!  

    IF AAPL pulls back at some point over the next two years, THEN you can sell some puts ($90 or lower) for $15 and pay for the spread and, if that never happens and AAPL heads up and over $120, then you make 89% in two years on cash with no margin – that's not terrible AND it's already a long-term gain, so low tax…

    If AAPL has a pullback between now and Jan, it's likely to be our trade of the year for the 3rd year in a row (with short puts to make our 500% goal on the trade for the 4th consecutive year) but, for now, let's just call it a great trade – even at this price.  

    By the way, you can sell the 2017 $80 puts for $4.80 and the net margin on that is just $8,000 (according to TOS in ordinary account).  If you REALLY want to own 1,000 shares of AAPL for $80, then you collect $4,800 and you can put that towards 10 of the above spreads at $15.83 and that nets you in for $11,000 (ignoring the 0.03), with a $19,000 upside (170%) against $11,000 in cash and $8,000 in margin – so 100% return on cash and ordinary margin.

    The only difference is committing to own AAPL at net $91, but even that assumes you never stop out your short puts or the spread.  Realistically, the puts have a delta of 0.15 and the spread has a net delta of 0.23 so your delta on the trade is 0.38 x 1,000 = $380 per $1 move in AAPL.  Keep in mind the deltas change over time but, in general, since you are SELLING premium (Being the House – Not the Gambler!), time is always on your side so all you have to worry about is on or off track and your risk net $3,800 on a $10 drop in AAPL or $7,600 on a $20 drop.  

    That's the real risk of this trade, not $91,000 – which is only your theoretical maximum loss if AAPL hits $0 and you stand there like a deer in headlights the whole time while it happens.  That's why I don't mind putting pretty large positions in our long portfolios, we're not really going to risk $91,000 – we'd pull the plug with a $15,200 loss ($40 drop to $76), which is just 30% of one of our $50,000 allocation blocks (in a $500K portfolio) using just the $19K in cash and margin (20% of an allocation block) to make $19K if all goes well. 

    Now, keep in mind that, in a real drop, the whole Nas would likely go down and the VIX would increase and the short puts would get more expensive but think of your situation with AAPL down $40 (34%) at $76.  You'd still have some value left in the bull call spread (depends on WHEN, of course), even if you didn't stop it out at 50% like you should have.  Then you'd have the short $80 puts and, the $120 puts ($40 higher) are now $22 so figure they'd show a $17 loss offset by, conservatively, $5 left on the spread, so net $12 would be the loss ($12,000).

    What would I say then?  I'd point out that the trade is actually only $4 out of the money on the put side and that you could roll to the 2019 $65 puts (guessing) even and if you don't REALLY want to buy AAPL for $65 ($65,000) – then you should take your $12,000 loss and go home.  

    THAT's the conversation we'd be having if AAPL drops $40 (34%) to $76 if this trade goes totally TO HELL.  If not, you have a very good chance of making 100% and, if you don't go too crazy with your allocation, you can even look forward to maybe doubling down at $76 to make a freakin' fortune in 2019 (if AAPL recovers $90 by then).  This is why AAPL has been our trade of the year for the past two years – there's simply too many ways to win and win big on a fairly reliable stock – isn't that the kind of thing we SHOULD be investing in?  



Stay Connected

157,450FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles