Option Investor

Option Writer Portfolio - November

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EPS Trade

As promised in last nights Market Wrap, I am sending out the AAPL EPS short option position. Since I don't cover spreads in this newsletter, I am just going to describe the short call and short put position. This trade needs to be placed prior to the close and covered at the open tomorrow. AAPL is down over $6 to about $92 ahead of the earnings release. Therefore, the example I sent out last night isn't valid because I prefer to sell strikes far enough out of the money so as not to lose much money if it goes against me. The stock looks weak so I am selling the November 70 Puts and the November 115 Calls. As the chart below shows the Delta on the "LIVE" row is negative 67. That means that the position is designed to profit more from a decline in AAPL shares and will lose money should it advance. However, the Delta can change from negative to positive quickly if AAPL declines too far too fast. The Theta shows that this is a positive time decay position. Basically, we should earn about $166 per day from time decay. Mind you that the Delta and Vega changes can offset the time decay gains.

You can't see the option string, but the November options have and Implied Volatility of 85% while the farther our options have an IV of 68 -75%. With that in mind, the assumption is that the options will lose about 15% in IV overnight once the EPS are released and the options open tomorrow. The above trade is 10 contracts. Just divide the total margin and max gains to determine the per contract costs and return potential. Below is the P/L chart with tomorrow as the day and 15% less IV. The max gain is about $1,800 if the stock remains flat. But it won't stay here. AAPL can go up to 103 or down to 77 before it begins to lose money, assuming the assumptions are correct. I have to finish this up if it is going to get to you in time.

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