In this article I wrote about the potential for AAPL to “bounce” higher following a short, sharp decline in June. That article included a hypothetical option trade that might allow a trader to take advantage if AAPL did in fact bounce.
Well, it bounced.
Now comes the hard part.
The Original Position
The original example trade involved:
*Buying 4 Sep 160 calls @ 1.28
*Selling 4 Aug 160 calls @ 0.69
The total cost and total risk was roughly $260. The original risk curves appear in Figure 1.
Figure 1 – The Original AAPL position 6/27 (Courtesy www.OptionsAnalysis.com)
The “idea” was that if AAPL merely managed to bounce back up to its old high a decent percentage gain was possible.
The Update
As of roughly 9:40 CST on 7/25 AAPL had bounced back up from $143.74 to $153.59 and the option trade has an open profit of $256 – or roughly 100% on the initial cost and risk of entering the trade.
Figure 2 – The Updated AAPL Position as of 7/25 (Courtesy www.OptionsAnalysis.com)
The Decision
From here a trader could:
a) Let it ride and hope that AAPL gets closer to the peak profit price of $160 a share – which could generate a great deal of additional profit.
b) Exit the trade and take a 100% profit – i.e., ring the cash register before the profit vanishes.
c) Adjust the trade in some way to lock in some sort of profit while still letting the position ride.
Summary
As I have limited time at the moment I will not attempt to answer the question nor make any suggestions beyond the following:
*Note the potential to use options to enter into inexpensive speculative trades with limited risk
*Note that there is no right or wrong answers among a, b and c above.
*If you want to be a trader you’d better get used to making decisions like this on a regular basis.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
