Mark Campbell

Mark Campbell
Contributor since: 2012
The drive down in Apple is driven mostly by fear that its margins will decline due to increased competition. In 2012 AAPL enjoyed a gross margin of 43.8%, operating margin of 35.2%, and a 26.6% profit margin leading to a substantial 44.15 EPS last year.
If AAPL must lower its product prices in order to compete these margins will not be as significant and therefore EPS will be significantly less. For instance Dell had a gross margin of only 20.9% last year. If AAPL gross margin declined to 30% it would represent a 25 billion dollar loss of revenue (based on 2012 numbers). This could take its net income from 41.7B to 16.7B and would represent an EPS of only 17.6.
AAPL still has great growth prospects as it still doesn't have a majority market share in personal computers or smartphones for any market. Its products are still have not been fully embraced outside the US and if AAPL can change this its EPS will balloon. Unfortunately, if AAPL has another earnings miss in January and more evidence of declining margins continue then the stock could easily be trading in the 300's in February.
One way to profiting with FXE it to buy a distant out of the money call option like July 135 and selling weekly 130 call options though I may move it down to 129 next week.
The Wednesday close before weekly earnings and before the weekly options were created AAPL closed at $608. Today it closed at $603, despite the pre-earnings decline. I standby my assertion that AAPL is stable during earnings week. However, I did buy a May call option because I would bet that AAPL is going to slowly rise in the coming weeks.
When you write an article you have to choose one of three generic disclosures then there is room to add an additional disclosure. None of the three generic disclosures accurately describe my position so I add more detail in an optional text box below hence the contradiction.
True but some investments are more of a gamble than others.
Buying OTM calls would be equivalent to a long position. If Apple has a poor earnings report you can likely kiss your money good bye. I'm looking for a reliable trading pattern that is profitable.
I disclose it to be honest I purchased it just before the ipad 3 release when IV was high. I get maximum profit if the stock is between 560 and 690 at the end of this week.
Thanks for the compliment. As an engineer I've been trained to write in a very dry and straightforward manner.
It is an historically stable stock during earnings week as evident by the graph. I agree it has been kind of wild since it broke 500.
That is coming in my next article.
Thanks. I didn't include your non-earning plays as that may be a cause for any deviation plus I could always make a mistake.
On a separate note using this techniqueI opened trades on CREE and GS on Thursday and closed them on Friday. I made a solid 10% after commissions on GS and 6.5% on CREE. My limit on GS hit its mark in the morning and I didn't want to hold CREE through the weekend and decided to just take the profit. I'm looking forward to a full earnings season.
My math counts exactly 50 trades that were entered into during the first three months of this year (one earnings cycle). The average return per trade was 3.8% per trade. Assuming this is reduced 1.5% for the cost associated with commissions the return is 2.3% per trade. The average return (2.3%) per trade multiplied by 50 trades is 115%. Therefore the return with this method is 115% whatever someone allocates per trade.
If an investor allocates 10% of their portfolio every trade they would have returned 11.5% of their portfolio this past quarter.
If an investor allocates 15% of their portfolio every trade they would have returned 17.3% of their portfolio this past quarter.
If a particularly risky investor allocates 20% of their portfolio every trade they would have returned 23% of their portfolio this past quarter.
Quite impressive for non-directional trading.
The close before earnings release:
JPM climbs to 62%
WFC drops to 55%
For current option chains any quality broker should do this automatically, it is the historical IV that can be difficult to find. You may need to change a setting in your trading window to view IV which is what I had to do with my broker. I'm currently using trade monster and I have been quite happy with them.
After Wednesday Close:
JPM remains at 53%
WFC continue to climb to 59%
IV continues to climb as the market tanks.
JMP is up to 53%
WFC is up to 55%
I'm glad you find it helpful.
A couple tips.
Always use limit spreads and stick to stocks with narrow bid-ask spreads.
Always check IV for the option spread you are looking at before entering in a trade. Be aware of how the value of an option position will change with respect to IV (Vega).
My first option trades were vertical spreads which are relatively simple and easy to understand. Let me know if you have any questions.
Big jump in IV today.
JPM is up to 44.5%
WFC is up to 47%
If there is a dip to 40 tomorrow I will buy a straddle on either one.
Thank You.
I haven't graphed the IV of GOOG like I did with the above stocks. GOOG is a good candidate to attempt to profit from rising IV as it is a stock with heavily traded options. If you trade it just make sure you are confident you are getting in at a low price.
Using my methodology and assumptions.
JPM had an IV of 32.5% for the weekly option at close on Thursday.
WFC had an IV of 30.5% for the weekly option at close on Thursday.
Markets were closed on Friday.
Kim,
I got my first article published and I mentioned your option strategy on it. I would appreciate if you took a look at it and provided your feedback.
http://seekingalpha.co...
Mark
I closed my April 14 Straddle fifteen minutes before close @2.39. I made a cool 4.7% after commissions. I'm really starting to like this method. I made 8.6% on ACN last week and a measly $4 on WAG this week. I'm looking forward to when more companies report each week.
I've noticed everything spikes at least a few percent a half hour the close before earnings release. I got into RIMM today April 14 Strangle @ 2.25. I'm not going to think about closing until 3:30 tomorrow.
What was your trade?
I've looked I don't see anything next week that is high option volume with a tight bid-ask spread. Perhaps Kim knows something I don't.
All valid points. I would also litigation to the list. In the US if a worker gets hurt even through his own stupidity the company can be on the hook for a few million dollars. In China if a worker gets hurt you just get a new worker.
I wouldn't add regulation to the list because Apple puts a great deal of requirements on its subcontractors.
Kim,
What do you do if the bid-ask spread is very large? I ask because if I use limit orders I usually need to put my limit at least in the middle of the spread or closer to the ask price to get in the trade. To get out I usually need to put my limit in the middle of the spread or closer to the bid price to get out.
It seems to me that this strategy is best with high volume options with narrow bid-ask spreads that are easy to get in and out.
I have also heard of this strategy called a "stock repair strategy." However in this case it is usually presented with a scenario where the investor buys a stock or a LEAPS option and shortly after buying it the stock pulls back. Then the investor could buy a call option and sell two other call options with greater strikes priced at half the price or greater of the purchased option.
Kim,
How do you determine if IV has yet to rise? Granted I understand there is no guarantee that IV will rise. My broker offers a graph of IV over a time period such as a year. I was wondering if there was a more formal approach you use such as a comparison of greek values? Maybe a ratio of vega/theta ratio for instance.
Thanks, I love your articles and unique approach.
This article is written at a time when AAPL's implied volatility is fairly high at 29.7 so the author's theoretical 21% return is fairly large. The author also assumes that you never take a capital loss and all the call options expire in the money. Factor in a lower implied volatility and the commissions which the author correctly pointed out and the real return is much less.
It's frustrating for everyone. I bought a deep in the money call option on this stock that expires this Friday. My understanding is that the CEO said something about a drought in South America that will limit demand for farm equipment. Most of the growth was outside the U.S. and the dollar has been getting stronger so that will hurt future earnings.
Brian, I have to ask you why you only bought half of your DE shares on Friday? I try to avoid commissions at all cost so I would never do that unless I had a good reason to.
What would you recommend for someone looking for something advanced?
I've been trading options for about 6 months now and my account is up more than 30%. I've read a lot online about options and the book Options for the Beginner and Beyond by Edward Olmstead, it had a few good ideas but was relatively simplistic in my opinion. I also have a masters degree in engineering so I can handle complex math and subject matter.
I can't believe anyone thinks facebook is worth so much. It only made 1B last year. Its revenue is entirely dependent upon advertising. They have about 1 billion users and I doubt that number will increase very much in the future. Some people like me aren't going to join and a substantial number of people in the world who live in poverty don't have internet access or money to buy what is advertised to them.