How We Made 613% With Apple Options In 7 Weeks And Expect To Do It Again In 4 Months

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) has had quite a run for the last seven weeks, moving from $585.16 at the close on August 27th to $691.28 at Friday's close, September 14th. People who were smart enough to buy AAPL stock made 18.1% on their money, and are probably celebrating their superior intelligence, or at least their good luck. (Most people seem to attribute their stock market successes to their great choices and their losses to bad luck in the market.)

Subscribers to Terry's Tips who followed our actual portfolio which uses calendar spreads betting on a higher price for AAPL did a little better. They gained 613% after commissions over the seven weeks. (One of our subscribers told us he had invested in 20 units of our portfolio - his $34,240 investment is now worth $209,800 and he is a very happy camper).

Most investors would be happy with this kind of gain once in ten years of investing. We expect to do it again between now and the third Friday in January 2013 if we are right again and AAPL continues to do well.

Some sage once noted that almost never counts except in horseshoes and hand grenades. I think we can add a calendar spread options portfolio to that list. If we are almost right and AAPL doesn't move higher over the next few months, we can expect similar gains if the stock just manages to stay flat.

Just over two years ago, we set up an actual portfolio for people who believed that AAPL was a good stock to own. A $5000 portfolio was set up in a separate brokerage account so that results would include all commissions. As everyone knows, AAPL has had a nice run over that time period. Several times we withdrew cash from the portfolio so that new subscribers could mirror the trades with approximately the original starting amount.

A total of $13,000 was withdrawn from the account, so subscribers who followed the portfolio from the very beginning had all their money back, plus $8000. The account is now worth $10,490. It is a little hard to calculate a return on investment when the average amount at risk is a negative amount, but we have guessed that we have gained 630% over a period when the stock gained 158%. Our options portfolio performed three times greater than the stock. The percentage gain would have been far greater if we had left all the money in the account instead of withdrawing so much.

Here are the actual positions in this account at the present time:

We have 7 call calendar spreads at each strike price from 685 to 715. The long side is the October series and the short side is usually in the weekly series but this week the regular monthly options are taking the place of the weeklies. As anyone familiar with calendar spreads knows, you only have to come up with the difference between what you pay for the long side and what you receive from selling the same-strike call with a shorter lifespan.

The above options have a value of $9575 and the total portfolio value is $10,490 with $915 in cash for making adjustments if they are needed.

The following risk profile graph shows what we should make or gain at the market close next week, September 21st at the various possible prices the stock may end up.

If the stock ends up flat at the end of the week, we would expect a double-digit gain on our investment (just like with hand grenades, we are close enough to make a nice win). If the stock goes up by $10 or $20 for the week, we would expect about a 20% gain. The break-even range extends for $7 on the downside and $27 on the upside.

If the stock were to move $10 higher early in the week, we would make an adjustment, selling off the lowest strike (685) spread and replacing it with the same calendar spread at the 720 strike. Making this adjustment would move the entire graph curve to the right. The mandate of this portfolio is to maintain a bullish stance (in option terms, we always have positive net delta so that we gain if the stock moves higher).

If the stock moves lower, we typically do not adjust until it has gone down at least $15 (we have another AAPL portfolio that maintains a more neutral stance, and that portfolio would be more aggressive in adjusting on the downside).

Each Friday, we buy back the expiring weeklies and replace them with the following weekly same-strike calls, using the cash that we collect to either add new calendar spreads or extend the lifespan of the long side of existing spreads (e.g., replacing October calls with November calls).

That is the strategy in a nutshell. The gains or losses each week are not exactly the same as what is indicated in the risk profile graphs because option prices (implied volatilities) fluctuate and alter the expected results somewhat. This portfolio incurred large losses over the period that AAPL fell by about $100 after the disappointing April earnings announcement but has bounced back nicely once the stock reversed direction.

Since we believe that the iPhone 5 will be one of the greatest new product introductions ever (and there is pent-up demand throughout the world), we expect that the general direction for the stock will be up for the next four months through the Christmas selling season. If a deal is struck with China Mobile, we believe the stock could go even higher.

So our plan is to continue the strategy of calendar spreads as outlined above, hoping for another 600% gain over the next four months. We should be able to do it even if the stock stays flat. By the way, most of our subscribers do not follow our trades on their own but have their broker place trades for them in their own account through a service called auto-trade.

Now we are hoping for those iPhone 5s to roll off the shelves in unprecedented fashion. I expected to get mine on September 21st along with a few million other people.

Disclosure: I am long AAPL. 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.

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