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 short the (AAPL) January, 2013 $575-$650 Call Spread at $3.25 or best
12-24-2012 – 11:00 PM EST
expiration date: 1-18-2013
Portfolio weighting: short 20% to hedge existing long 20%
= 6 Contracts
I am going to sell short the (AAPL) January, 2013 $575-$650 Call Spread to hedge out my risk in the following existing two positions.
long (AAPL) January, 2013 $525-$575 call spread
long (AAPL) January, 2013 $450-$500 call spread
Buy doing this now, I get to take in the accelerated time decay over the holidays, when markets are closed. It allows me to take advantage of the extraordinarily high premiums in Apple calls, which are now at four year highs. It also mitigates our losses if Apple stock continues to go no where and the $525-$575 call spread expires in January at less than its maximum value.
If you don’t have these positions, then you don’t need this trade, unless you want to be outright short Apple stock over $575.
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. If you don’t get filled, then just wait for the next Trade Alert. There will be many fish in the sea.
The same applies if, for any reason, you don’t understand this trade. Better to watch this strategy unfold on paper in the model portfolio before you try it with real money.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this profitable position:
Sell short 6 X (AAPL) January, 2013 $575 Calls at.………. $3.70
Buy 6 X (AAPL) January, 2013 $500 calls at…………...….-$0.45
Net Cost…………………………………………..…………. $3.25
Maximum profit at expiration = $3.25
($3.25 X 100 X 6) = $1,950, or 1.95% for the notional $100,000 model portfolio.