This post is about establishing multiple positions in AAPL that are placed in different expiry’s to allow for the harvesting of profits throughout the year. Get it? Apple, harvest…hmmm…tough crowd. 😒 Okay, moving on.
This was my tweet on July 22 mentioning the AAPL market profile chart. This post isn’t about market profile so I won’t delve into all of the details of that method of price analysis but suffice it to say that it’s a good method for determining excess or when price is rejected at a certain level. BTW, if you’d like to read that post, you’ll find it here. It was clear that sellers completely dominated buyers over that period of excess. This understanding of the price action helps when looking at a standard candlestick chart.
Below is a closer up view of the market profile chart from the July 22nd tweet. The excess peak occurred on July 19.
Below is a candlestick chart showing the July 19 potential reversal candle (#1) and the price action following that day. Normally I’d think that price testing the Fib retracement resistance zone 6 times would be an indication that buyer’s were stronger than seller’s but, in this instance, based on the price reaction since July 19, it appears that there was large volume distribution going on and the bears, not the bulls, were propping up price in order to unload their shares on the rally chasers! As of today (Aug 12) price is down over 10% from the July 19 high.
Let’s say you took advantage of establishing a bearish position in AAPL at the close on July 31 (#6 on the chart above). That was good location for a short with a stop above the July 19 high. Let’s also say that you think that AAPL, and the market in general, could be in for a rough 6-12 months. I could play that by placing lots of short term trades of anywhere from 0 DTE (Days to Expiration) to a week or two. The problem with trading a long-term price expectation with short-term trades is price is going to go up and down over the short-term regardless of the longer-term trend. That means a trader could lose on a series of bearish short-term trades even while the longer-term trend is down! That occurs when traders sell/short the breakdowns only to see price rally back up to resistance before declining once again. Don’t believe me? Look at any daily chart of a stock and see how many counter-trend moves that occur. Many of those moves are quite strong! Instead, why not just start initiating longer-term trades in the option portfolio? Below shows a risk profile of 3 trades that could’ve been made on July 31 with a long-term bearish bias. The combined initial capita outlay was $1,436 and, since these are long-term positions, there wouldn’t be a big drawdown due to negative Theta if price didn’t move lower quickly. When price actually did move lower relatively quickly the positions could have been DH’d (Delta Hedged) to a net cost of $45 by noon on Aug 2. That’s right, forty five dollars! Those adjustment trades you see below are the product of rolling the long strike of the Vertical Put spread down and selling a Put Vertical Credit spread turning the position into a Condor.
So now, with just $45 of the initial cost of the trade still at risk, the potential profits could total as much as $3,500 over the next 10 months. IF my initial risk of $1,436 was a comfortable amount of risk for my size portfolio and my current net cost is now just $45, that means I can add new trade(s) at good trade location (don’t short the breakdown, short the retracement) in the amount of $1,391 to take my risk back up to $1,436. Let’s say, theoretically, I was able to repeat the trades and adjustments shown above again. That would take the potential maximum potential profit up to $7,000 over the next 10 months with a net cost of $90. Other expiry’s, either shorter or longer-term, could be added to the position to further reduce expiry risk.
Maybe you have the exact opposite opinion of where the price of AAPL stock is headed. Maybe you think $220 is more likely than $150. Fair enough. Since nobody knows where price is going to be trading at in the future we are all just trying profit from our expectations. An AAPL bull that owned this position could use it to help cover their downside risk while owning the stock or a bullish Call position. What’s not to like about owning up to $3,500 in downside protection for just $45? This trade, as well as all trades that I make, is about finding good trade location based on a chart and initiating a position. IF the chart setup fails to follow thru I can exit the trade with a relatively small loss. IF the trade does follow thru as expected, I reduce or eliminate the original risk by Delta Hedging the position in order to protect my investment capital. A simple enough strategy, yes?
Questions or comments? Leave them down below.