Wednesday, March 21, 2012

$AAPL $10k trade in 30days.

I recently posted a 19% yield while owning $aapl stock. Here is another way of generating income a la Dividends. btw, if you like these posts spread the word, folo @racernic & peruse the rest of my post including the sides ;-) I do these post for free and have no subscription pitches etc.
Instead of buying the stock, I can buy a deep-in-the-money (DITM) long-dated call (out a few months or even year+ - LEAP).
Here are the numbers as of yesterday's close (i wrote this yest and didn't have chance to update)
Aug12 aapl 550 call is $84ish. so, buy 10x100x84= $84k (as opposed to if i wanted to buy 1000 shares of appl fir 605k)
I can sell april call 645 against this long DITM position that I own. For this I collect $10. For this to make sense, i sell a shorter-dated call (much shorter). Time decay will be on my side eating away at the near-dated short 645 call. Since I own 10xDITM call, I can sell 10x call so my take would be $10 x 1000 = $10,000.
that's a return of 11.9% in under a month.
To close the position I either manage the short call to expire worthless in April (for max prof) then sell my asset (the long-date DITM call). Or I can close the position anytime by buying back the april short call and selling the long Aug call.
Desired outcome is: aapl closes below 645 by April 20th (April option expiration) and I keep the whole $10,000 I collected today. and I sell my long DITM call (I can choose to keep it and do it over again).
In case aapl raches 645, i can adjust the position until I let it expire or close it to pocket most if not all the 10k. The theoretical probability of aapl NOT reaching 645 is abt 80% (that's darn good in my favor).

if 84k is too big i can go half
- buy aapl  DITM Aug12 550 call 84; 5x so outlay 5x100x84= $42,000
- sell aapl Apr12 645; 5x so collect 5x100x10ish = $5,000 (same 11.9% return on a smaller scale)
- close trade by managing 645call to expire; sell the long DITM call to recoup investment +/- change in price

Or even smaller with just one lot (which is what i do for my 10year old son)
- buy aapl  DITM Aug12 550 call 84; 1x so outlay 1x100x84= $8,400
- sell aapl Apr12 645; 1x so collect 1x100x10ish = $1,000 (same 11.9% return on a smaller scale)
- close trade by managing 645call to expire; sell the long DITM call to recoup investment +/- change in price

As with any trade there are risks but in this case the I am very comfortable with the dollars at risk. I always try to know and manage my risk; I ask 'what will I lose if the crap hit the fan in the worst possible way.' If I know the answer to this and am ok with it then I should be ok.