Yesterday, David Einhorn was all over the news about how Apple is hoarding cash and what he thinks the best path for Apple is to return value to its investors to potentially unlock billions of dollars of value in the stock. Here’s a link if you want more details of the plan and what is being discussed.
As technical traders, we don’t usually care about news events like this but AAPL had huge surge in the last 30 minutes of yesterday’s session. This late day rally broke a gap window level of the previous earnings sell off. What’s also interesting is that there is a huge amount of Open Interest at the 500 strike of APPL.
In this week’s video, I show you how I’m playing this news event, technical breakout, and options expiry with a Condor that has the potential of making 1000% by next Friday.
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Apple Condor Trade – Video Transcription:
Hey guys! Welcome to the StockOptionAssassin.com’s weekly video for Swing Trading Options. This is Eric. I want to take a look at Apple ($aapl) today and talk a little bit about a news event which I typically don’t look at. We’ll talk about some technicals and news as well.
Basically, yesterday Einhorn came out. He’s a huge billionaire dude. He came out and said Apple needs to do something about all their cash. Apple initially denied this. They said he was crazy, they’re not going to do anything and they’re going to hoard their cash. Then late in the day, the very last 30 minutes of trading yesterday, (you’ll see I’m on a 15-minute chart with Apple here) Apple surged huge because basically Apple came out with a statement saying that the Board would consider something to do with their cash to return to investors.
I’m sure you can get a much more detailed statement of what they said, but basically what we’re looking at now is Apple rallied and is continuing to rally the following day. You also have options expiration for February next week. I started looking at the Open Interest. You see where Apple might be headed to.
Also, just on the daily chart over here on the left, you can see that Apple had that earnings sell-off. They have come into a little bit of a double bottom and they broke gap window yesterday. Basically, on that surge up yesterday you can see gap window was here around 460. Apple in the last 15 minutes was trading below that but surged past gap window. Now you have to look at possibly gap fill which is actually at 515 but also at least come up to maybe 505 here in the next week or two.
Let’s go ahead and quickly look at the option chain for Apple. You can see I have here highlighted the 500 strike, both calls and puts. You can see we have a huge amount of Open Interest on the 500 calls, 29,000 contracts. Volume on that is very active today as well. You can also see a pretty decent amount of puts up there as well on the Open Interest which is almost 16,000 contracts.
How can you play this?
For me, a low risk play to play this is either doing the 500 butterfly call fly or a condor. I actually chose a condor. I put this position on this morning. Let’s look at the Analyze tab real quick in Thinkorswim. I took a small position. This is a full risk position. Basically, what I did was I put on a condor. Not an iron condor, a standard condor which is basically where I bought the 490 calls.
Let’s go back to the Analyze tab real quick. I’m going to put on a standard condor. You can see this is the condor that I put on where I bought the 490 calls, I sold the 495’s, I sold the 500’s and I bought the 505’s. Basically, I create a spread. It’s easier to see in the Analyze tab, but basically for $0.45 per contract, I bought ten. I’m risking the entire thing. If Apple does rally up into this 495 to 500 zone, then my $450 that I’ve outlaid will become over $4000. That’s about 1000% gain there.
Will Apple rally up there? I don’t know. But last month, a lot of you guys probably are aware that Apple did pin at 500 bucks, so Apple does have the ability to pin there again and that’s what I’m looking at for the play. My breakeven is here around 490 and 504. If Apple actually rallies through that, then I would actually start to lose money but it would still be profitable. But really, what I’m looking for in Apple is can we get up to this $495 to $500 zone where I can get max gain? Maybe I scale out of this.
The reason why I didn’t go higher is, first of all, the options are telling me $500 is a better pin. But gap fill may actually get filled after that. But I am expecting some sort of pull back in the market possibly next week. Apple has the potential to buck that trend but I don’t think we’re going to hit gap fill next week. That’s how I’m playing Apple in that Einhorn news. Let’s see if Apple can get up to 500 next week or even 495. I would look at scaling out of that.
For those that are not familiar with condors, right now to exit this trade, I basically bought all out of the money calls. If Apple does not rally and Apple just sits at 480, the red line here… My calls would basically go to zero. I don’t have to do anything. It will be a full loss there, max loss. But if Apple does rally up into this zone, then my 490 and 495 calls are going to be worth something. Therefore, they will be in the money and I would need to close those, otherwise I run the risk of getting assigned stock. I have every intention, if we do get in here, to close the entire trade because I do not want to get assigned stock.
That’s A Wrap:
We’ll see how that goes next week. If you have any questions about that trade, let me know. I’ll talk to you guys next time!
Hi there,
I’m interested in the alerts service but I’d like to see the trade by trade performance for the last few years please.
If you could send it in excel that would be great!
KR,
Jamieson