Apple Credit Spreads: Targeting 500% Return

Sep. 19, 2008 11:07 AM ETAAPL, GOOG21 Comments
Everyday Finance profile picture
Everyday Finance
661 Followers

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
prices.

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.

Symbols:
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).

Rationale:

Here are the drivers for an upward move by January:

  • Most importantly, the recent decline in Apple's shares are really a result of poor general market conditions and not necessarily

This article was written by

Everyday Finance profile picture
661 Followers
The author has a background in Chemical Engineering and an MBA specializing in Finance and Biotech Management. He is primarily focused on alternative investment strategies that aren't widely covered in the mainstream press such as hedging strategies, non-market correlated instruments, high-yield investments, international/developing markets, small biotechs and arbitrage. In addition to his contributions here at Seeking Alpha you can also visit him at his blog ETFBase (http://www.etfbase.com/), which provides free independent stock research, a real-time personal accounting of his personal trading portfolio, market commentary, and personal finance advice. Visit: ETFBase (http://www.etfbase.com/)

Recommended For You

Comments (21)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.