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James Maxwell
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I have been analyzing options pricing for 5 years now. My experience is it is typically more advantageous to sell options rather than buy them. I believe choosing options appropriate to using time decay to my advantage. I have 11 years of experience in risk management and analytics.
  • Apple: Selling Puts Ahead Of Earnings 5 comments
    Jul 22, 2012 6:56 PM | about stocks: AAPL

    Apple Inc., will announce it's third quarter earnings on Tuesday, July 24th. The fundamentals and growth of the company should inevitably lead to higher share prices in the future. In Apple's second quarter the company earned $11.6 billion in profit on revenue of $39.2 billion while expanding cash reserves to over $100/share.

    (click to enlarge)

    Apple July 24th earning report

    How to profit- Sell Aapl Aug18 525 put

    My options strategy for Apple's earnings report after the bell Tuesday, July 24th is to sell Aapl Aug18 $525 put for $2.43. The strategy is a winner if Aapl goes up, stays flat, or goes down slightly. It loses only if the share price finishes under $522.57 on Aug 18, 2012, a 13+% decline in under a month.

    Why $525? Why Aug 18?

    I feel that this is a comfortable safety margin for the stock and believe it is very unlikely Aapl will make a $80+ downward move in 27 days. With 27 days to expiration, at this strike price, time decay will quickly lower this option value. $500 is too far away to use maximum advantage of time decay and $550 is too close for comfort.

    In making this trade I will collect $243 for selling one put contract. To sell this put I'm required to put up $5,480 per contract as a maintenance requirement with my broker. Assuming Aapl is trading around $605-$610 at earnings, my safety margin for this trade
    is 605-525= $80 move in apple share price.

    My hope with this trade is that Aapl will go up after earnings. If it does the value of the put option I sold will fall quickly to almost nothing. Since I already sold that put, I'll be able to buy it back very cheaply (cover it), keeping the remainder as profit. This scenario would profit about 80-90% on the put by Wednesday morning.

    If Apple remains flat after earnings I'll profit as well. The upcoming earnings report has elevated options prices. If apple comes through earnings and remains near flat, the put options will quickly fall. At this point, I will cover and take a quick profit.

    The Bottom Line

    This is a relatively conservative strategy. You stand to collect $243 up front per contract (broker maintenance requirements may vary). You profit quickly on this trade after earnings if Aapl goes up, stays flat, or even falls slightly. It is always easier to predict where a stock won't be than where it will be. I will explore this topic in detail in further articles. I am also planning an after Aapl earnings follow up article.

    Disclosure: I am long AAPL.

    Additional disclosure: I am short Aapl Aug 18 puts.

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Comments (5)
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  • pressure sensor
    , contributor
    Comments (79) | Send Message
     
    a normal brokerage account would require cash security of 52500 per contract sold minus the 243 received for a grand total of 0.46% return!
    23 Jul 2012, 12:47 AM Reply Like
  • James Maxwell
    , contributor
    Comments (9) | Send Message
     
    Author’s reply » I use TD Ameritrade, they have lower reserve requirements. The requirement is calculated from a few simple formulas and the amounts required for different brokerages vary widely. You're right, the trade isn't practical if you use a broker that needs a high margin requirement.
    23 Jul 2012, 10:14 AM Reply Like
  • James Niles
    , contributor
    Comments (29) | Send Message
     
    A cash secured put, one that would require over 50,000 per contract would likely be needed for an IRA account. If you have an individual account with cash that you are free to do what you want with, you can write opitons for much cheaper and would have the ability to write both naked calls and puts.
    23 Jul 2012, 02:58 PM Reply Like
  • dixonge
    , contributor
    Comments (15) | Send Message
     
    Looks like $30 of your $80 safety margin is gone in after-hours trading. Hope a lot of people see this as a big discount buying opportunity!
    25 Jul 2012, 05:37 AM Reply Like
  • James Maxwell
    , contributor
    Comments (9) | Send Message
     
    Author’s reply » I was able to close out the position this morning at 575 with a slight profit. Worked out well considering I had the direction totally wrong. Good buying opportunity to go long now as well.
    25 Jul 2012, 03:20 PM Reply Like
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