Using a tried and true options method to capture upside gains in a leveraged fashion while limiting out of pocket expenses, I entered into a credit spread position with Apple (AAPL) with a January Expiration.
I've entered into credit spreads in the past with oil and long strangles with Apple before, but here's the most recent position I've entered and how it works. A credit spread is defined by wiki as:
In finance, a credit spread, or net credit spread, involves a purchase of one option and a sale of another option in the same class and expiration but different strike
I had promised myself recently that if I got the opportunity to buy Apple at 120's levels again, I would do it. After watching this stock yo-yo from 120 to 180+ multiple times, this week provided me the kick in the butt to make something happen.
I bought 2 Jan 155's and sold the Jan 175's to create the spread for a net outflow of $745.
Bought 2 APVAK @ 6.84 ; Sold 2 APVAO @ 3.18
How It Works:
If Apple shares continue to flounder and never reach $155 per share, all the options expire worthless and I'm out $745.
If Apple shares rally, I capture any upside gain past $155, but I'm capped at
$175, for a maximum return of 2*$2000=$4000, or better than a 500% return.
If Apple shares rocket to say, $300, it's OK, as long as I have the same number of long and short calls. I will always be at the $2000 profit per position ($20 per share spread times 100 shares leverage per contract).
Here are the drivers for an upward move by January:
What could go wrong? If Google's new phone starts to outshine the iPhone, Google (GOOG) will rally and some air may be deflated from Apple's balloon. The solution? I own Google shares as well.
I entered into the position the afternoon of 9/18. By the end of trading, the stock had rallied $7 and the position's net gain is over $70 or 10%. Small potatoes for now, but in after hours, Apple's up an additional $3 and I expect follow through in tomorrow's market with an impending announcement by the Fed/Treasury on a new financial vehicle to shore up credit problems in the financial sector.
Disclosure: As of the time of publication, the author is long Google and has a long option position in Apple.
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