IWO Video: AAPL Earnings and Alt Asset Classes

Here’s a rough transcript of the video:

The markets showed some afternoon weakness as we failed to hold the highs from the morning. We closed into potential support but it is tenuous at most. When we zoom out to a larger timeframe we can see that we remain range bound and it seems that the market is coiling for a large move one way or the other. If we did want to hold on to a bullish premise, what I’d like to see is a strong move up in the market without any catalyst whatsoever from national governments. No bailouts, no stimulus packages, no interest rate cuts. If the markets did move up on their own, that would mean demand is increasing for risk and people are willing to put more capital to work. If we can make a strong move up and break above 105 on big volume, we could see a significant bear market rally for this quarter.

However that large upmove remains uncertain and If we have sustained weakness we can make a new intermediate term low. If you look at the price action from the 1929 crash you can see that this is what happened then and is a distinct possibility in ths market, so you need to keep your position sizing and delta risk low.

I want to go over the AAPL earnings option play that I thought up on yesterday’s video. It was a double calendar, and you can see the risk profile here. Since I did check this out before the market opened today the risk parameters were different than what you could get on the open market, so you couldn’t get into this exact play. The overal debit was a little larger, which pulled in the breakevens.

Another thing to not is that this does have vega risk, which means the position will lose money with the volatility crush, but not nearly as much if you had bought straight puts and calls. The overall goal of this position was to find a risk defined strategy that was low in risk.

It’s very hard to find a position that is vega negative with these sort of risk parameters. You could sell straddles and strangles but that leaves you with theoretical unlimited risk. You could do a butterfly spread, but you’re odds of a profitable position are less since the spread is smaller. You could sell OTM verticals, but those will net you about .3-.5 risk/reward. So it all depends on what you are comfortable with and what sort of risk are willing to take. Right now AAPL is trading at 103 after hours, a 13% move, and we can see that it puts you right in the middle of the circus tent, but I have a feeling that it won’t be at that price in 3 weeks. So if hypothetically you were in this trade, you could do some stock options black magic and buy back the front month puts and calls you sold at better prices and could work the december strangle into an iron condor or just leave it be. This is an advanced strategy, but it does have defined risk. And playing options can get cet you burned anyways.

And if that rant didn’t make any sense, contact me and I’ll try and clarifty.

Anyways, had a request from Soren, the co-founder of stock twits to go over a particular play DBC. This is a commodity etf. This is supposed to track the Deutsche Bank Liquid Commodity Index. It’s got ight, sweet crude oil, heating oil, aluminum, gold, corn and wheat. Soren’s a forex and commodities guy and he’s bullish on this. It is in a downtrend, but it could revert to the mean. And these kinds of ETFs are optionable which is very cool. The only problem is they’re thinly traded, so the bid/ask spread is wide and it’s tough to get in. So you’re at the whim of the market maker. You can get filled if you hit the bid ask. Yes, that’s me. I’m the only one that traded this contract. Anyways the strategy here is to buy far out ATM calls. The 30 are at about 2.30 so by January of 2010 the stock has to trade above 32.30 to break even. A very good possibility. And the theta isn’t to high right now as you’ve got a ways to go. And if we do get to about 31 I’ll sell front month calls against my position to reduce my basis. If I can time it right I’ll have a negative basis by the time January 2010 rolls around. It’s a slow play but it’s a nice play.

And there’s other asset classes that you can gain exposure with using options. Even though the options are thinly traded you can get currency exposure like FXE, FXA, FXM, FXY. Some bond etf’s have options too like TLT.

And the options market has ever increasing volume and you’re going to see these strategies start to become incorporated by the big fish, so it’s a good idea to get acclaimated to these strategies before they start to get popular.