AAPL Earnings Trade

• stevenplace
• January 25th, 2010

Editor’s Note: This was a trade alert sent out to my subscribers, I don’t know if the open will give us a profitable position– but I wanted to show you the techniques I use when putting on a position like this.

I’m looking to sell volatility in AAPL, very similar to our GOOG, GS, and ISRG trades. Here’s the rationale:

Despite the recent volatility, AAPL remains in a 3 month range, between about 187 and 215 — about 30 points total. There are very strong levels of support around 190 and 215, so chances are we won’t see a breakout gap (up or down) from earnings.

After the selloff, we’ve seen a large premium get bidup in AAPL options– we are back to levels we haven’t seen since last april. I feel that this is a sell.

So let’s take a look at the front month straddle:

Current straddle is priced it 20.87– so breakevens at expiration are around 190 and 230, with a slightly bullish bias. If you think that by Feb expiration the range is going to hold, this means vol is a sell.

Now if we get back to “normal” volatility, I’d be looking for about a 8% drop in IV. Let’s see where that puts us in our straddle sale:

So with an 8% drop that would put our b/e tomorrow around 195 and 225 — a 15 point move either way.

Here’s the trade for our 40k model portfolio:

SELL -2 IRON CONDOR AAPL 100 FEB 10 230/240/190/180 CALL/PUT @3.25 LMT

Edit: try a fill of 3.20 or do the legs seperately (230/240 call spread, 190/180 put spread)

This is a moderately bullish play (delta +8) that has a breakeven of 186 and 234. To be profitable tomorrow assuming a 8% drop in IV we’re looking at breakevens of 195.29 and 223.70, so as long as AAPL doesn’t gap up or down about 7%, then we should be good.

If you can trade premarket, then you can hedge if we get a strong move, but that’s too much micromanaging and we have a limited risk on this trade.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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