Before we kick open the door on another festive (and misunderstood by a few) Apple (NASDAQ:AAPL)-themed edition of the $100,000 portfolio, let's review where things stand, as of late in Wednesday's trade:
- Long 100 shares of AAPL at $565, as result of an ITM May $565 put. Value: $56,161. (- $339).
- Long 3 AAPL October $530 calls. Cost basis: $69.75 ($20,925). Value: $20,655 (- $270).
- Long 7 AAPL October $700 calls. Cost basis: $11.35 ($7,945). Value: $6,790 (- $1,155).
- Long 3,000 shares of Pandora (NYSE:P) at a cost basis of $10.03 ($30,090). Value: $30,930 (based on price of $10.31 at 11:48 a.m. Pacific) (+ $840).
- Long 2 Netflix (NASDAQ:NFLX) January 2013 $47.50 puts. Cost basis: $4.40 ($880). Value: $1,150 (+ $270).
With a cash balance of ZERO, the $100,000 portfolio sports a value of $115,686 thanks, largely, to AAPL's comeback over the last several days.
At the last update, the AAPL $530 calls were down $5,025, while the $700 contracts provided a $3,395 on-paper loss.
The $530s have come almost all the way back (recovering 95%). The $700s, meantime, have only clawed back by 66%. The stock has recovered by about 82%. To get those numbers, I am calculating the percentage change between the loss on May 17 and the loss, as of intraday Wednesday.
Because this is only a simulated portfolio designed to create and illustrate real world learning experiences, I handled the positions differently than I would have with real money on the line. Of course, AAPL bulls will point to the bounce and call me a complete fool for ever doubting Tim Cook.
Bottom line on that -- I will sell the top of this bounce sooner rather than later. If I miss out on more upside, so be it. I do not want to be in the stock when it pulls back again. If you're thinking long-term, remember you're no longer talking about Apple, you're talking about the company Steve Jobs built and Tim Cook can only hope to sustain.
I will take discipline any day of the week over too much optimism. That's why I will sell AAPL when it approaches $600. I can see the sense in buying more or holding no matter what if you have confidence in the long-term story. Simply put, I just do not share that sentiment.
More importantly, though, the in-the-money calls on AAPL have come back from the dead at a more impressive clip than both the stock and the out-of-the-money calls. This is something I stress repeatedly in Seeking Alpha articles as well as in my Options Investing Newsletter.
When you go ITM, particularly with long-dated options, you have intrinsic value on your side. That's the difference between the market price of the underlying stock and the strike price on your call. You will always have at least that much value as part of the premium of your call.
When you go OTM, however, you have no intrinsic value. It's all time premium. And, as expiration nears, it becomes less likely that your call will move ITM. The closer to expiration you get, the worse your chances of moving into ITM territory. Once time decay really kicks in (4-8 weeks out), that premium erodes at an increasingly rapid pace.
For now, we'll stand pat with our $100,000 portfolio positions. Next week, especially if AAPL's breakout continues, we will make some more moves.
Disclosure: I am long P.