I had planned on waiting until options expiration day in March to update the status of the $100,000 portfolio (see the trade log here) simply because I have several options positions that expire then. I wrote the last update on February 21st and told myself that I would not even tally the total until March 17 or thereabouts. And I have not, nor do I intend to.
But I had to bring something up because it might be instructive for some readers.
I am getting ragged and riched (new terminology) by Apple (AAPL). I believe in doing certain things to hedge long positions that you believe in to not only protect against downside, but to generate income. Usually, it works out well for me. In the case of AAPL, however, it's not. Here's how things stack up, as of Wednesday's close.
I own 10 AAPL March $500/$510 bear call spreads that brought in a credit of $1,380. Pretty nice. Of course, AAPL could swoon between now and March opex, but, assuming it doesn't, I am on the hook for $10,000. That's the difference between the two strikes times ten. Essentially I am short 10 calls (the $500) and long 10 calls (the $510). If AAPL closes above $500 on opex day, I would get assigned on the short calls, exercise the long calls and pay the difference. With AAPL trading over $510, that puts me out $10,000.
Of course, I could reduce that amount by the $1,380 credit received, but it's easier for me to keep my books if I do not. As such, the actual loss in that situation would be $8,620. Still no fun.
Why did I enter that trade? I have had full confidence all along that AAPL would do what it's doing. I just did not expect it to happen so fast. Think about this - when I initiated the trade back on February 8, AAPL closed at $476.68. Using today's close of $542.44, that's a gain of 13.8%. Doesn't sound like much, but it dwarfs the returns of most other stocks and all of the major indices.
Clearly, I am bullish despite this short-term trade meant to bring in a little bit of income. The AAPL January 2014 $600 call that I purchased for $32.80 provides proof. That contract closed with a bid price of $73.40 today, which leaves me with a gain of $4,060. While that eats into the loss I will likely take on the spread, it only goes a small part of the way to erasing it.
I'm not sure there's a lesson here, other than do not bet against AAPL unless you're doing it on a short-term technical basis. And even trades that you consider sane, logical and conservative - I mean I did not feel bearish in the least when I decided to put this trade on - can work against you.
I could have executed this very same strategy with practically every other stock on my watchlist (save maybe PCLN) and come out looking great. Go long a LEAP, write a near-term OTM bear call spread. But not AAPL. Lesson learned.