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Robert Edwards
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Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
  • A Fabulously Profitable Apple Call Strategy For A Falling Stock Price  14 comments
    Jan 30, 2013 6:39 PM | about stocks: AAPL

    In this article I will explain how I plan to earn $100,000+ in 2013 in my IRA while risking no more than $30,000.00. With Apple trading at $450, it would take $45,000 to purchase just 100 shares of stock, and $450,000 to control 1000 shares of stock. Using the following OPTION strategy I will show how I plan to control as much as 1000 shares of Apple worth $450,000 with only $30,000 or less at risk. The trade is leveraged at a ratio of up to 15 to 1.

    I will be buying January 2014 Apple calls that are $40 out of the money at a cost of nearly $3,000 each. This allows for the purchase of 10 calls when employing $30,000. Apple options are about the most liquid stock options on the planet and buying a year out will allow the price to find a bottom and have plenty of time left for bullish surprises from earnings announcements, new product launches, dividend increases, etc. Since it will take a $40 rally to get to the strike price and an additional $30 to cover the option purchases, a $70 pop is needed to get the options profitable at expiration. But in a whole year, $70 is nothing! The stock dropped from $514 to $440 ($74) in just two days following earnings. It can pop back up about as easy as it went down. Since I have about 50 weeks to expiration of the options and I need a $70 rally to cover all my costs at expiration, then slippage (time decay) would be less than $1.50 per week.

    To increase my chances of success, I will scale into the trade (scale trade) by buying one option on every $10 dip of the stock price. Starting at $450, I would buy a January 490 call, and then at $440 I would buy a January 480 strike call and so on. By the time the Apple stock price fell to $360, then I would exhaust my entire $30,000 but I would own 10 Apple call options and control 1000 shares of stock once the options were "in the money". My ten calls would have strikes that ranged from 490 down to 400, so the average strike would be 445. Above the price of $445 then I would earn $1,000 for every dollar Apple stock went up. At expiration, I would need a further $30 rally in the stock price to cover what I paid for the options, so if Apple was at $475 at expiration in January 2014, then I would be at breakeven. But that is after a year. If after 6 months I wanted out of the trade at breakeven then I would only need for Apple to trade at $435 thanks to the time premium that the options would still hold.

    In 2012, Apple had a high to low trading range of about $267. If Apple in 2013 had a trading range of just $215, then if the stock price low was $360 then the high of the year would be $575. At the price of $575 the option position could be liquidated at a net profit of $100,000. Not a bad return on $30,000 in an IRA.

    But of course that was the description of a perfect scenario. If the low of the year is higher than $360, then I will not get all ten of my options purchased $10 strikes apart. However, if the stock retests the lows several times and the bottom holds, then I maybe would go "all in" on the remaining options to average the breakeven price down, or just invest the cash elsewhere. Another thing that could happen (highly unlikely but still a possibility), the stock could go down to the lows and never rally back to breakeven the rest of the year. If that occurs then part or all of the investment would be lost. However, if that would occur then I would just do the exact same strategy in 2014, buying option strikes maybe $5 apart and surely sometime in 2014 Apple makes a nice rally that takes the stock all the way to $600 or higher and both year's investments are recouped, along with a profit of maybe $100,000, $200,000 or more. If Apple was a total dud in 2014, I could do this strategy again in 2015 and sometime we get a rally of $100 above my breakeven to let me become an overall winner. It just takes persistence.

    Over the next couple years Apple will be adding a billion dollars about every week to its coffers so at some point in the next 2-3 years won't it at least double if not triple the price it is now trading at?!

    I am an excellent swing trader and I believe with this much leverage, I could swing $100,000 profit for the year if the stock did nothing but go sideways. I believe I could breakeven if the Apple stock price continued to drop. I would just take partial profits on rallies, and buy back calls on dips. I will update my progress on a quarterly basis so readers can see how well I progressed with this strategy.

    In closing, I am a professional day trader who normally only sells option premium and never buys calls; I only go short calls. However, I believe the sentiment is so unjustifiably negative on this company after it reported earnings that other companies would die for, that at some point sentiment improvement alone could bring me my profit goal. If Apple sentiment just went from negative to neutral, wouldn't it trade $100 higher than today? If sentiment ever turned bullish, would it not be worth a $200 pop from current levels just on improving sentiment alone? Netflix rallied 70% post earnings because the company earned $7 million in an entire quarter. Apple earned $7 million every 70 minutes in order to reach the $13 billion profit they reported! Thus, I don't believe this stock can stay under $450 long-term and under $400 even short-term. Apple call options are so cheap that they are screaming to be bought! Can you hear them?

    Disclosure: I am long AAPL.

    Additional disclosure: I will be implementing this call strategy in the near future.

    Themes: Options, IRA Stocks: AAPL
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Comments (14)
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  • LitheInvestments
    , contributor
    Comments (69) | Send Message
    Cool. Aapl is looking like a good trade, it's hard to bet against this company unless they plan on cutting dividends or something.
    30 Jan 2013, 07:38 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (582) | Send Message
    Author’s reply » Thanks. A dividend increase is surely to come in the near future.
    31 Jan 2013, 03:38 AM Reply Like
  • JonMay3
    , contributor
    Comments (2) | Send Message
    Agreed, dividend and stock buyback increase is a lock in the next 9 months or so...
    3 Feb 2013, 05:42 PM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2731) | Send Message
    Actually your ten options would probably cost you less than $30,000 as you have forgotten that each one would fall a little bit in price, (leaving out considerations of implied volatility). However, if the stock plunges after a quarterly earnings report, you could find yourself buying 3 or 4 options at the same time at different prices.


    I don't like the January 14th 2014 idea, as you only have 3 quarterly earnings announcements to deal with, and the next one is already not looking too great. I would think more along the lines of combining this plan with selling the January 2015 $350 puts to finance your long call purchases. You could sell 10 of the $350/$340 put spreads for $3,000 to buy a long call each time the stock falls. The plus side would be that each time the stock fell, you would get more for the put sale and pay less for the long option.


    In addition, you might consider buying the 2014 bull call spreads for about $2,000 (or less as the price falls) so that your $20,000 could be turned into a potential profit of $80,000.


    Of course in an IRA you would then have $100,000 at risk to make $100,000, but you would only need the stock to hold $350 in 2015 to make a $10,000 profit, which seems very likely given that by 2015 there will be about $200 per share cash. So even a modest return of 10% in 2 years would be possible even if the whole plan flops.


    If you don't get to purchase more than a couple of long options because the price takes off, then you have the added bonus of the put spreads becoming profitable at a much earlier date than expiration.


    Anyway, as a Rookie, it is always good to get ideas from someone with as much experience as you and I will model the trades and look deeper into the possible outcomes.
    31 Jan 2013, 09:35 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (582) | Send Message
    Author’s reply » Thanks much for commenting! Your comments show you are much more than a rookie, ;-). I left out implied volatility to try and simplify the thought process for novices as those are the types of complications that give rookies an excuse to not try options. Again why I left out ways to sell puts or even calls to partially or fully pay for the call purchases.


    If one is going to put up $45,000 to buy 100 shares, I just thought why not consider investing up to $30,000 in calls and earn a lot more than one would owning 100 shares, with limited downside and the ability to average down.........
    5 Feb 2013, 04:33 PM Reply Like
  • BruinWrtier78
    , contributor
    Comments (95) | Send Message
    Any update on how this position is doing as of June?
    10 Jun 2013, 02:23 PM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1317) | Send Message
    This is a interesting strategy. I don't understand options very well but I am extremely bullish on the stock.


    I assume you are not able to collect dividends right?
    1 Feb 2013, 01:27 AM Reply Like
  • JonMay3
    , contributor
    Comments (2) | Send Message
    That is correct unless you can and choose to exercise the call prior to the ex-div date otherwise you lose out on the dividends paid out along the way being a call buyer instead of a stock buyer.
    3 Feb 2013, 05:43 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (582) | Send Message
    Author’s reply » Hey, I am still a rookie because I learn something new every single day I trade. I am a 32 years and counting......over night success. You call yourself a rookie but trust me, based on your comments you are far from a rookie as most people define it. A couple things you mentioned has got me thinking.........


    Anyway, I originally considered several strategies to partially or fully fund the calls if I was trading in a margin account, as well as an IRA. But in this article I was trying to oversimplify in hopes that a total novice might get a glimpse of what a powerful tool options are. Knowing that simple is always the best, I cut things down to this very mechanical method that can be implemented and hopefully understood by any novice trading in their IRA. When I got done, I even convinced myself that this just may be worth trying, and it might teach me something in the process........because when it comes to call buying.....there is no bigger rookie than me!
    5 Feb 2013, 12:40 PM Reply Like
  • aferraro
    , contributor
    Comments (6) | Send Message
    6 months in and I'm wondering how the strategy is progressing?
    31 Jul 2013, 02:56 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (582) | Send Message
    Author’s reply » I have not been doing the trade as I lost faith in the ability of Apple to rally enough to make the trade viable. One is buying several dollars out of the money and then one needs a rally off the lows of $70 to $90 to break even and $120 or more to make any real money. Recently Apple traded a few dollars under $400. Apple would need to trade by the end of the year above $500 which I am not sure will occur.
    31 Jul 2013, 11:50 PM Reply Like
  • rasmushenriksson
    , contributor
    Comments (3) | Send Message
    Looking to do something similar, i.e. 10-20k worth of Jan 2015 calls that are ~50 out of the money...what's your take on AAPL right now...would you?
    14 Feb 2014, 11:45 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (582) | Send Message
    Author’s reply » I liked Apple a lot more when it was trading $30 to $40 lower than where it is now, but one could still probably work the strategy successfully.
    15 Feb 2014, 02:23 PM Reply Like
  • BruinWrtier78
    , contributor
    Comments (95) | Send Message
    Apple was at $456 on Jan. 30, 2013. It hit $542 on Jan. 22, 2014 (expiration date for your calls). It looks like you would have done all right with your strategy.
    16 Feb 2014, 03:36 PM Reply Like
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