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The WORM In The APPLE

|Includes:Apple Inc. (AAPL)

What is worse than finding a worm in an Apple?

Answer: half a worm!

So let's review what can be done to salvage your position.

Remember with options you can drastically change the risk/reward of a position.

Today the earnings were announced and Apple shot straight up to $528 after closing at $514. And you were short stock so you covered it in the after market. Guess what? The stock's earnings were analyzed and it dropped to $462. That's a $66 drop !

If you bought the stock you lost $60. If you were long on the close you thought you had made a profit but instead you are going to come in tomorrow with a $52 loss or 10%.

Had you done the option trade of buying the stock at $500 and selling the $500 calls and $410 puts for next January your cost would be $410. You could suffer a $90 drop before you would lose money. Or if stock stayed at $500 you made 22%. Even if stock were to drop to the aftermarket low of $460 you would still make $50 on your net $410 investment.

OK that's the past what to do today? I am only estimating since the options don't open until tomorrow.

But assume you bought stock at $460 and sold the JAN 2014 $460 calls for abut $50. My estimate of the $360 put would be about $40. You would collect $90. therefore your cost is $460 - $90 or $370.

If stock stays at $460 you make $90 on $370 or almost 25% for one year. You are protected if stock were to drop another 20%. $460 to $370. down 20% you don't lose. Unchanged you make 25%. Stock goes up from $460 to $580 you would make 25%. Now the stock stays at $460 you make 25%. If stock rallied to $600 you would have made more owning the stock outright.

Risk: if stock drops below $360 you would own "200" shares at average of $365. (370 and 360).

Enjoy options! Lots of fun and profits with less risk.

The Optionmaven

Stocks: AAPL