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A Bearish Apple (AAPL) Trade

Published on June 8, 2009

A Bearish Apple (AAPL) Trade

June 8, 2009

The Apple Worldwide Developers Conference (AWDC) is starting today and AAPL stock has been on an upward movement for past few weeks. At OptionPundit, we played this event around this time last year and made good gains. While the same approach (Bearish bias) has pretty good chance of making money, context however matters. This time around we have two key things in play a) Uncertainty around Steve Job’s return and b) General Macro Economic Environment. So read my post through skeptical lenses.

There are a lot of speculation around “what if” Steve returns and “what if he doesn’t”. Most markets participants don’t expect any significant move in stock as Tim Cook has been doing a good job in keeping both investors as well as Wall Street happy (AAPL stock moved from a lows of $80s to $146 last week.)

Let me share some observation (shared by another OPN member) on AAPL price action leading to AWDC. The price upward movement starts as early as 8 to 18 days prior to the AWDC since 2003. And on the 1st day of AWDC, it is generally higher but either the same day or in a matter of few days it closes sharply lower. It behaved the same way last year; dropped sharply on the opening day of the AWDC itself.  If you are looking for past dates for an analysis, here are past AWDC dates:

  • 2008: June 9-13
  • 2007: June 11-15
  • 2006: Aug 7-11
  • 2005: Jun 6-10
  • 2004: Jun 28-30
  • 2003: June 23-27

While you are doing your analysis and stock price movement, you may want to look at-

  1. When was the AWDC date announced?
  2. How did the price behave leading to the date? rather how many days before price started to advance?
  3. How did the price behave on the opening day?

That’s for above the surface analysis. For below the surface, you may want to look at Greeks, Price/Volume analysis to assess what happened to AAPL internals pre and post AWDC. For, even if you are on the right side of the trade, you may not make money if greeks are not in favor. I am looking for a bearish trade set-up and If I get more time I shall share what trade set-up I am looking for. You may consider Bear call spread, Bear put debit spread, put diagonal, straight put, etc.

If you want to share your views or participate in a conversation, start sharing your views via comments here in this post. I shall add my trade idea later in the comments section.

Disclaimer– Past performance is no guarantee of future returns and hence pls do your due diligence before investing. I don’t have it opened yet but I may do so anytime.

Profitable Trading, OP

11 Comments

  • OptionPundit says:

    Oh Well, before I could even share a bearish trade, Mr Market already supported my bearish bias. In case AAPL drops below $141, I may open a June 140/130 bear debit put spread.

  • OptionPundit says:

    Soon after the key note address started, AAPL quickly dropped about $2. Once the contingent order was triggered when AAPL was at $141, the trade started to make money and nimble traders could have exited for nearly +15% profit for the above debit spread.

    The prices have been slashed almost across the board and battery life is increased to 7hrs.

  • Reuben says:

    I liked the 1×2 140/135 JUN put ratio spread for 0.10 debit (+margin requirement). The risk of this position is if we meander down to 135 but no lower.
    I give it about a week to see how it will move – after that theta may start causing pain. There is still plenty of downside for AAPL given how strongly it has moved up the last couple of weeks.

  • OptionPundit says:

    Reuben, thanks for sharing your trade idea. Could you pls elaborate a little more on the structure of your trade (better if you could share the fill prices and the margins as required by your broker). I shall share my thoughts on this a little later.

  • Reuben says:

    Hi, trade is as follows:
    SELL 1xJUN 140 put
    BUY 2xJUN 135 put
    for a net debit of 0.10 (this was the fill price 1×3.64 and 2×1.87 on each leg)
    Note that there is a margin on this of $500 which is the maximum loss AT EXPIRATION if the price was exactly at 135. why? because you have sold the put but have not realised any value in the 135 put.

    Possible outcomes:
    Stock goes nowhere – no foul, no gain, you can get out again for a similar price as you got in
    Stock goes up – same situation
    Stock goes down a little bit – this is the worst case scenario at expiry, although if it does it this week then it will be quite profitable.
    Stock goes down a lot – if this keeps moving below the 135 level we get to participate in that drop.

    Now, considering how strongly AAPL has increased i dont think its out of the question to see it drop below 130.

    Greeks:
    Delta – we want this to move in our direction, will be favourable if moves with us, against us is limited impact
    Gamma – will increase delta more toward expiration
    Theta – not our friend, time is the enemy of this position
    Vega – increase in volatility will be beneficial – and with the expectation of a drop you would expect an increase in volatility

    of course, with this idea, caveat emptor.

  • OptionPundit says:

    Thanks for sharing your trade Reuben. I think this is a good trade with its pros-n-cons. One of the strong point of this trade is that it doesn’t lose any money (beyond this $0.10 debit) should AAPL go up and away. At expiration, the trade will only make money once AAPL goes beyond $129.9. Of course it will still continue to make money as AAPL drift lower till then in spite of IV and Theta dampening the gains.

    To build on to your trade, if you like intra-day trading, you may choose to convert this into vertical (depending upon direction) and then again into ratio spread to maximize your gains [one of the many ideas to maximize gains :)]

    Net, I think it will work out pretty nice if AAPL were to make a large move quickly. Best wishes!

    Profitable Trading, OP

  • OptionPundit says:

    Bulls are trying pretty hard to defend $140 area for the past 3 days. Let’s see if it can hold on to that level.

  • OptionPundit says:

    As of this writing, the above trade is already in profit +15%.

  • OptionPundit says:

    This is to let you know that the bearish trade that I shared here (https://www.optionpundit.com/trade-ideas/a-bearish-apple-aapl-trade), I have closed it today, I am left with only 1/3 of original positions. I first closed for +10%, and today closed for +35.6% gains, all within this week itself.

    If you were following this trade, you may want to book profits and close it.

    Profitable Trading, OP
    OPNewsletter – A No Nonsense, “No Profit, No Fee” Option Trading Newsletter.
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  • Ron says:

    OP:
    Good trades, How about converting it into a butterfly or a condor by adjusting the current position with SHORTING CALL VERTICAL.
    Thus, reducing DELTAs and maintaining NEGATIVE BIAS. What do you think about this?

    Ron

  • OptionPundit says:

    Closed remaining 1/3 position today for net 48.6% profits.

    Net tally is like this-
    1) Initial 1/3 profit at 10%
    2) 2nd 1/3rd profit at 35.6%
    3) last 1/3 profits at +48.6%

    Seeya AWDC next year.

    Profitable Trading, OP

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