In a pair of articles published just over a week ago on May 8th and May 10th, I had suggested two possible approaches the investor with $5,000 to invest in Apple (NASDAQ:AAPL) stock might use in an IRA or cash account.
What both articles had in common was that they suggested a progressive three-stage accumulation of the stock, adding each time the stock dropped $35 in value until the full $5000 was invested. (Obviously this strategy is scalable, and if you wanted to use it to invest a larger sum, this would be possible.)
Unbeknown to readers at that time, I implemented the same strategy myself so that I could report updates on the strategy in the future to see
what went wrong if there were any discussion points or tweaks that would be interesting to readers.
Plan A, you may recall went like this:
Step one: Look up the current price of Apple stock and then go to the options tables and identify the current at-the-money January 2014 LEAP call strike price. Let's call our strike prices S for strike. We are going to call the current at-the-money strike price S(1), for reasons which will become apparent.
I actually put on this trade using the $575/$605 strike prices. Here we see those 2 options sitting in my brokerage account, a little slimmer than at the time of purchase.
Apple had hit a high of $644 on April 10th, 2012 and had now fallen $70 or 11%, so it seemed that we had a reasonable entry point. The price of Apple shares typically spikes around earnings announcements, but after an exhilarating ride upwards had now fallen back about 11% on, possibly, profit taking, a sovereign fund cashing in its chips, employees monetizing incentive stock awards, investors faced with tax bills, hedge funds seeking liquidity for the Facebook (NASDAQ:FB) IPO, a combination of all, or none of these. No one really knows, but the stock was cheaper.
If you wanted to buy the stock at that level ($575), it was reasoned, you should like it even more if it became even cheaper. The plan was to buy again if the stock fell another $35 to $540. This was Plan B.
With the stock down $35 from the $575 level when I opened my position, the stock was now down over $100 from the high of $644,or about 17%.
The plan was to spend about $1200 on each spread, so the option spread quote needed to be around 1/10th of that number at $12.
This time I submitted an order for the $535/$565 spread, however since I suspected that if current trends continued, the price of AAPL might easily go lower in the short term, I made a slightly reduced bid of $11.50, below the mid-price on the quote hoping to catch a down spike and get the order filled.
I left the order open as "good till cancelled". If it never filled, it was no great loss and would probably mean that the stock had bottomed. On the other hand, it gave me a little breathing space and if the stock went south another $5 and the order was still unfilled, and I was paying attention, I could still make last moment adjustments.
In fact at close of business AAPL was at $530 and my order had not been filled, so I resolved to take a look at the pre-market prices the next day, before deciding whether to pull the order. If I could buy in at a lower price, this would be a better overall strategy as it would give me a lower break even point.
So that is how this strategy of building a $5,000 options position in Apple is unrolling. So far everything is going to plan. Money has been lost as hoped for. Future updates will reveal whether it is recouped and/or how soon, according to the way AAPL crumbles.
Disclosure: I am long AAPL.