As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Trade Alert – (AAPL)
Sell the (AAPL) January, 2013 $525-$575 Call Spread at $9.27 or best
Closing Trade-Stop loss-not for new readers
expiration date: 1-18-2013
Portfolio weighting: 10%
($10,000/100/$5.79) = 3 Contracts
This has been an absolute pig of a trade, the worst one of 2012. Apple stock has absolutely failed to rally at every opportunity. When there is good new, it goes down. When there is bad news, it goes down. When there is no news, it goes down.
The capital gains tax selling last year was understandable, as owners sought to avoid the higher tax rates mandated by the resolution of the fiscal cliff. But now its 2013, and that argument no longer holds water.
The stock opened strong on January 2, and made it all the way up to $556, right at our break-even point. I figured that with the pressure of the tax selling gone, there was plenty of time for the shares to rally back up to our maximum profit point of $575 by the January 18 expiration. It was not to be. It has since failed multiple rally attempts. These options expire in only six trading days, so it is time to salvage what premium we can and take our lumps.
It is hard to figure out what went wrong here, but I’ll take a shot. People are still beating down Apple’s doors to buy its fabulous products. IPhone sales, where the bulk of the company’s profits come from, came in at a healthy 45 million units in Q4, 2012. Yet Apple still offers the cheapest valuations in the technology space.
I think there is something new going on here. The company may be just too big. It is possible that all traditional valuation tools go out the window when a firm exceeds $500 billion in size. Over a certain point, a larger market cap produces falling earnings multiples, and the stock doesn’t move, no matter how rapid the earnings growth. It’s hard to say for sure, because no company has ever gotten this big before. It’s all part of our brave new world.
If you’ve been in the game for 45 years, as I have, sometimes epochal, world-changing events unfold, they move all the goalposts, and everything you’ve learned in your life proves useless. That is part of being in this unforgiving business. The challenge is to figure them out before they put you out of business. As they say in karate school in Japan, you can’t block every punch, even when you win the fight. Use every loss as a learning experience.
I’m sure that the stock will eventually do well, so shareholders will be rewarded. It’s just a matter of time before strong earnings growth drags the stock price up. That approach doesn’t work if your options expire next week.
I was able to mitigate some of the losses by selling the January $575-$650 call spread against it and adding the $450-$500 call spread, taking in 3.85% in profits, narrowing the net loss to 4.55%. In a perfect world I would also have sold the November and December call spread as well, and we could have gotten out of this mess for even.
But sometimes, when you have too many balls up in the air, one occasionally hits the ground and goes thud. This is why I usually keep my portfolios so small.
The other lesson here is on the value of call spreads as a strategy. The position in the $525 calls gave us huge, asymmetric upside exposure if the stock performed as expected. If it didn’t, much of your loss was offset by the short in the $575 calls, which cratered from $74.70 to $0.41.
At all times, we knew that our loss could never exceed 10% of our capital. I have run this position for three months, there are only six days left, but the spread is still retaining 15% of its value. This is despite the stock falling $100, or 16%, since I initiated the trade. This is why I will continue with call spreads, as they are ideally suited for the kind of low volatility conditions we currently see in the market.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months further out.
Here are the specific trades you need to execute this profitable position:
Sell 3 X (AAPL) January, 2013 $525 Calls at………………………. $6.20
Buy to cover short 3 X (AAPL) January, 2013 $575 calls at………. $0.41
Net Proceeds………………………………………….…….………. $5.79
Loss = $37.50 - $5.79 = $31.71
($31.71 X 100 X 3) = $9.513, or 9.51% for the notional $100,000 model portfolio.