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I've been trading independently for about 10 years using mostly options and stock. The options world is often made out to be much more complicated than it really is, so in my posts I'll talk about some topical (and not so topical) trading styles that I like to use myself that can really enhance... More
  • Miss Out On AAPL At $450? No Problem, Use Options To Place Your Limit Order And Get Paid While You Wait. 0 comments
    Feb 10, 2013 4:47 AM | about stocks: AAPL

    So, you missed out on Apple Inc. (NASDAQ:AAPL) at $450. The stock was right there but you just didn't pull the trigger. Why not? Maybe you were worried about panic selling? Maybe you were expecting more bad news on margins? Today the stock closed up 1.44% at $474.98 and is trading even higher in the after market session.

    The price action looks good, for now. But with David Einhorn's law suit over the company's cash stock pile and fears of a market pull-back there might still be a chance to get into the stock at the bargain price of $450.

    Of course, every online brokerage will let you to place an AAPL limit order at $450 either for the day or GTC (Good Till Cancelled). If the stock trades back down to $450 your order will be filled and you'll have your stock.

    But what if AAPL never trades back all the way down? What if we have missed the boat? Your limit order will sit there unfilled and, more importantly, you won't have any profits to show for it. This is where options can become a powerful tool and boost the returns and the alpha in your portfolio.

    Instead of placing your limit order, sell the March 2013 $450 AAPL Put to Open on the $6.30 bid for a credit of $630 (less commission) to your account. This trade is economically equivalent to putting on a $450 limit order for 100 shares of AAPL for 36 days, only now you are being PAID $630 to have the order open.

    Now, there are 3 scenarios that could unfold:

    1) If the stock doesn't trade back down below $450 the option will expire worthless on the 3rd Friday in March and you will have your $630 credit to show for it.

    2) Even if the stock trades below $450 you will still make money on the option as the break even for this trade is at $443.70 ($450 strike price less option premium received of $6.30). So not only will you get filled on your stock, you also have a "loss buffer" of $6.30 to protect yourself.

    3) Below $443.70 the trade will behave exactly as the stock would, with losses 1-for-1.

    The sweet spot for selling options is at around the 30 day to expiry mark, as after this the time value decay of the options (theta) increases exponentially. This will allow you to make profits on the position as quickly as possible. If the spot price stubbornly stays away from the $450 strike a high rate of decay will allow you to close out the position with most of the gains without having to wait until expiry.

    In a market where outperformance is already hard to find, using options to enter and exit trades can significantly boost your alpha. Click the "follow me" button to stay informed on how options can boost the returns in your portfolio.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: AAPL
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