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Been involved in stock markets for 55 years. RIA for 44 years. Wharton Grad and JD in Law. Co-author of NYSE Options brochure in 1984. Basis for all option strategies today. Lecturer and Advisor to CME, CBOT, ABA, FHLB, KCBT, AMEX, CBOE and FMS. Leading expert witness in securities, commodities... More
  • The WORM In The APPLE 0 comments
    Jan 24, 2013 5:54 AM | about stocks: 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
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