Apple (AAPL) is one of the more interesting stocks to write about. Judging by the voluminous number of articles and comments, there is certainly no shortage of ideas and recommendations.
This article will not discuss the merits of AAPL or even the merits of any particular options strategy. Instead, I would like to present a different way for the AAPL owner and/or option trader to view various option strategies. One that can provide clarity surrounding exactly what they hope to accomplish.
Whenever I look at a particular options strategy I take a "Delta View" of it. An option delta is one of the "Greeks". For those unfamiliar, or those shying away from it, an option delta it is probably the easiest of the "Greeks" to understand and utilize. It can be thought of as the probability that an option will be in the money (ITM) at expiry.
Generally, an option trading ATM has a delta of +/-.50. This reflects a 50% chance it will be ITM, either as a call (+) or put (-). If the option is sold, rather than bought, the +/-s are reversed. An option very far OTM will have a small delta, and one already ITM a higher delta.
Complicated option strategies can be reduced to a "percentage" bull/bear by utilizing the Delta View. Let's look at the July $565/$600 bull call spread as an example.
Rather than looking at premium credits/debits and outcomes at expiry (the monetary view), let's take a "Delta View". The delta of the ATM $565 call is +.54 and the delta of the $600 call is -.36. Combined they result in a NET bull delta of +.19. Now, if I was only mildly bullish (20%) on AAPL, this would be a nice fit. On the other hand, if I was 50% bullish on AAPL, I'm "under-done".
Let's ramp it up a bit and look at my favorite, the calendar spread. In this case, selling a weekly ATM put ($565 strike) and buying a January 2013 put. The delta of the weekly put being sold is +.43 and the Delta of the January put is -.45, for a net -.02 delta. This represents a NEUTRAL stance on AAPL.
If I was bullish on AAPL, but looking for some downside protection, this particular calendar spread would be wrong. The combined deltas need to increase to reflect a bullish stance. This can be done many ways, here's two of the easiest:
1) Sell a January OTM put at, say, $500 strike. This will convert the protective put to a bear put spread. The $500 strike has a delta of .28 and reduces the combined deltas to -.17 (-45; +.28=-.17).
2) Sell the weekly put ITM at, say, a strike of $575. This would have a delta of +.67 instead of +.43, moving +.24 bullish.
Notice that, in this assessment, it was not necessary to show the option credits/debits. They are necessary in a monetary view, not a bull/bear (Delta) view.
The Delta View can also be applied when looking to protect a position. For instance, many consider AAPL undervalued at $565. If AAPL runs back up to, say, $650, some of these will start to think it isn't so undervalued and may look to lighten up. It's hard to quantify how much, but let's say the investor was now only 67% bullish on AAPL.
Let's say the investor had 100 shares of AAPL and was considering selling one-third of their holding. A Delta View would suggest selling a January 2013 call $100 more OTM ($750 strike) (delta -.33) on their entire holding. So, the investor might just want to look at this before finalizing their plan.
We could "monetize" this possibility as follows: Receive $2,800 premium credit, but holding 33 more shares:
1. Down Move: AAPL would need to fall $85 (13%) to lose more than the $2,800.
2. Up Move: Obviously the extra 33 shares is pure profit plus if AAPL lands under $750, the call credit is also gained. If AAPL lands exactly at $750, the extra shares gain $3,300 plus $2,800 on the premium credit for a total gain of $6,100. However, then ALL the shares are capped and a give back of the $6,100 at the rate of 67% of any continued up move results. The reader can do the math from here, but the up-side break even is an additional $135 move to AAPL= $885 (36%).
Now, I'm not going to predict which choice is the right one. In this case, the Delta View capitalizes on the bullish overall stance, but has some weakness in a large drop. The Delta View simply provides an easy to follow option alternative.
Conclusion: There are many ways to view any trade. Most people just look at it in terms of $$$ gained or $$$ lost. There are other ways to view a trade. The "Delta View" can help the investor evaluate a particular strategy on its bull/bear percentage in order to match it with their assessment of the particular stock.
Additional disclosure: I buy and sell options on AAPL.
