Friday, June 8, 2012

Crazy $AAPL trade that risks almost nothing

These are some crazy trading times and what better time to post a crazy trade. Although it is a crazy trade, it risks almost nothing. I love the risk/reward ratio on this.
BACKGROUND: I like $AAPL for mid to long-term trades. I believe that the company is dominant and has sustainable advantages across all its products; no one even comes close in second place. I posted bit more about it (see link at bottom later). Bottom line: aapl will be worth more later than now.

THESIS: I think that apple sold off from its post earning highs unjustifiably. I also believe that there is a good chance that it will blow its numbers away once more in its coming earnings release. Once that happens, they will come out of the woodwork to buy back what they just sold off hand over fist; hence, aapl will spike up big.

THE 'crazy' TRADE: I want to sell a July credit put spread. The strikes are what make this trade unconventional:
sell the 635 put
buy the 630 put
Yep, you read it right... end up with an in-the-money 635/630 July credit put spread.

THE NUMBERS: as of now, here are the numbers on it:
premium collected would be $4.25 (=>risk is .75)
the reward is +$4,250.00
the total risk is $750.00
that is 5.67 to 1 reward to risk ratio... that is darn high.
Theoretical possibility of success is 15%
This is a long shot sure. But it offers me big reward and not a lot of risk. Furthermore, in this volatile environment it's not anymore crazy that investing in the stock market... period! Plus I can unwind this one anytime in between.

BEST CASE: Apple will continue to rise approaching earnings period. Then reports blow out numbers and spike up past my short strike. I get to keep the $4250.

WORST CASE: Apple reports and still is mired way below my strike. My max loss is 750. Realistically, I may still regain some equity even in this bad case scenario and loss might be lower or break-even. But I still have to count on the complete loss assuming aapl goes to zero.

OTHER CASE: Apple will continue to rise approaching earnings and my credit put spread gets cheaper to close and I may chose to close it for some profit (keeping in mind that IV will remain elevated because of the upcoming earnings).

SURPRISES: Apple may announce a new product or service like the TV and/or TV feeds or ??? and spikes even higher.

here is the why I like aap post from a while back.