Follow Up – (AAPL) May 21, 2012

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.


Explanation to Previous Trade:

Trade Alert – (AAPL) - Update

Buy the (AAPL) August, 2012 $400-$450 Call Spread at $44.00 or best

Opening Trade


expiration date: 8-17-2012

Portfolio weighting: 25%

($25,000/100/$44.00) = 6 Contracts

Only execute with a limit day order for the spread in the middle market. If your order doesn’t get done, then increase your limit bid in 10 cent increments until you get filled. Prices are all over the map today. Don’t enter market orders on pain of death. You’ll lose your whole profit.

The recent route in the stock market has taken the stuffing out of Apple, dropping the shares by a mind numbing $120, or 18.7% from the April high. Apple now has a PE multiple of 8X and is growing somewhere in the neighborhood of 100% a year. The next blockbuster earnings report is only two months out.

So I am going to put on a large position in a low risk trade by adding the (AAPL) August, 2012 $400-$450 Call Spread at $44.00 or best. This is a bet that (AAPL) won’t trade below $450, or down another 15% by the August 17 expiration. That would be off 30% from the all time high. I still believe that it is just a matter of time before the shares reach to $1,000.

Here are the calulations for the trade:

Buy 6 X August, 2012 $400 Calls at $141.20
Sell short 6 X August, 2012 $450 calls at $97.20

Net cost $44.00

If (AAPL) closes anywhere over $450 on August 17, your profit on the trade is ($50.00 - $44.00 = $6.00). That works out to (100 X 6 X $6) = $3,330, or 3.33% for the notional $100,000 model portfolio. The total return on the trade is $3,330/$25,000 X 100 = 13.32%, not bad for doing no work over a three month period. It is a good summer trade to have when I will be doing a lot of traveling, the market volume declines precipitously, and many of the market particpants are gone or asleep.

From a tactical point of view, this gives us a core long to trade against, something I was lacking in Q1. That means I can use rallies to write calls against my existing long $400-$450 call spread, or sell short stock against it, taking in additional incremental income.

I have been running the numbers on this trade every day for the past two months, and watched the potential returns steadily climb. The stock market sell off has driven implied volatility for options through the roof, increasing the return on the spread. As of this morning, the potential profit is so large for a deep out of the money play on a company with great fundamentals that I couldn’t resist. So out went the trade alert.