Options Portfolio Update: Out Of Amazon, But More Apple Please!

by: Bill Maurer

For those who have followed my writing, you know that I started a theoretical options portfolio in early November that I maintain on this site. The portfolio was aimed at those who are willing to take risks, and many of the trades involve considerable risk. These are trades I recommend, but I do not partake in myself. As always, when trading options, remember that there are serious risks involved, and always know the specifics of your trade before making it.

A week or so ago, I made some changes to the portfolio, as half of the positions were impacted by March expiration. Here was the new portfolio (some of these positions were established in previous months), at the prices at which they were entered.

Name Date Type Strike Action Price
Apple (NASDAQ:AAPL) 7/20 Put $575 Sell $37.95
Visa (NYSE:V) 9/21 Put $110 Sell $5.75
SPDR Gold Trust (NYSEARCA:GLD) 9/21 Put $170 Sell $12.05
Nuance Comm. (NASDAQ:NUAN) 10/19 Call $25 Buy $3.80
Nuance Comm. 10/19 Call $34 Sell $0.70
Amazon (NASDAQ:AMZN) 7/20 Put $170 Sell $11.75
Zynga (NASDAQ:ZNGA) 9/21 Call $12 Buy $2.80
Zynga 9/21 Put $13 Sell $2.55
I'm going to make some changes today (Monday 3/26/12). I will buy back (cover) the Amazon put that I sold for $11.75. The buy back price is $5.70, meaning a gain of $6.05. I'll take it. Amazon has had a decent rally lately, and I'd like to quit the position while I'm ahead. I know that being a $170 put, there is room to collect more of that $5.70 premium, but I'm worried about Amazon's earnings report next month. Its last few earnings reports have not been spectacular, and at some point, the valuation will kick in.

Amazon is currently trading at more than 150 times this year's earnings, and that is just way too much. If either the company misses again on the bottom line (and earnings estimates are taken down), or the sales miss and its growth is questioned again, it will be taken down. Amazon has been skating on thin ice for a while now, and at some point, the ice cracks.

Before I get into any other moves, let me update on how the rest of the positions are doing. If I were to buy back the Apple puts, they would cost $32.60, which currently has me at a gain of more than $5. If I were to buy back the Visa puts, it would be a $5 cost, meaning a current gain of $0.75. Now I know gold has not done very well lately, so the GLD puts haven't done great, but there is still plenty of time to expiration. Currently, to buy back those puts would cost $13.35, so I'm not down that much. The rally on Friday helped a bit.

Now onto the two more complicated trades. First, Nuance is an iPhone play, as it is involved in the Siri device on the phone. The trade hasn't started working yet, but remember, it is based on October expiration. If I was interested in a one or two week play, I wouldn't have chosen October expiration options. That being said, if you want to enter this trade (Buy 25 call/Sell 34 call), you could currently execute it for $2.85. I think Nuance is going to rally hard thanks to not only the current iPhone, but the next one as well-- which we are already starting to hear rumors about.

The Zynga trade has already started working. It only cost 25 cents to execute, and if you closed out currently, it would fetch you 45 cents. Percentage wise, that's doing well, but it will work better. This Zynga play is based off the Facebook (NASDAQ:FB) IPO, which I believe is going to fuel the next rally in the social media stocks.

Now back to Apple-- it's time to make a really risky trade. As I stated earlier, this is a portfolio for those who are willing to take risk, so remember that. For this trade, I'm going to buy an October expiration $590 call for $59.95 and sell a $600 put (same expiration) for $58.85. If Apple takes off, you make a killing, however, if Apple falls, you lose on both the calls and the puts. This will be the most aggressive trade I've made for the portfolio to date. Since Apple has the largest market cap, and gets the most attention in the news, shouldn't it get the most attention in my portfolio? Yes, it should.

This is just a quick update to the portfolio. My next large update, which will be sometime in April, will provide a list of all the positions I've had so far in the portfolio (as you'll remember I promised a full summary of positions in my last update). That will be a more comprehensive article. For now, I just wanted to quick update the portfolio. In summary, out of Amazon puts, into more Apple.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.