Subject: Stock Option Trading Idea of the Week from Terry's Tips - Follow Up on AAPL Earnings-Announcement Strategy

 

Terrys Tips newsletter
     

 

Dear Friend,

Last week I told you about a spread I had placed on Apple (AAPL) just prior to their earnings announcement.  I closed out that spread this week, and there was a learning experience that I would like to share with you.

Please continue reading down so you can see how you can come on board as a Terry’s Tips subscriber for no cost at all while enjoying all the benefits that thinkorswim incentive offers to anyone who opens an account with them.

Terry

 
Option Tip of the Week

Follow Up On AAPL Earnings-Announcement Strategy:
                               

Last Monday, prior to AAPL’s earnings announcement, I bought a diagonal spread, buying Jan-14 470 calls and selling the weekly Nov1-13 525 while the stock was selling just about $525.  I made this trade because I felt good about the company and believed the stock might move higher after the announcement.  As it worked out, I was wrong.

I paid $62.67 for the Jan-14 470 call and sold the Nov1-13 525 call for $17.28, shelling out a net $45.39 ($4539) for each spread.  (Commissions on this trade at thinkorswim were $2.50).  The intrinsic value of this spread was $55 (the difference between 525 and 470) which means if the stock moved higher, no matter how high it went, it would always be worth a minimum of $55, or almost $10 above what I paid for it.  Since the Jan-14 calls had almost three more months of remaining life than the Nov1-13 calls I sold, they would be worth more (probably at least $5 more) than the intrinsic value when I planned to sell them on Friday.

So I knew that no matter how much the stock were to move higher, I was guaranteed a gain on Friday.  If the stock managed to stay right at $525 and the Nov-1 525 call expired worthless (or I had to buy it back for a minimal amount), I stood to gain the entire $17.28 I had collected less a little that the Jan-14 call might decay in four days. 

In the after-hours trading after the announcement, the stock shot up to the $535 area and I was feeling pretty good because I knew I was assured of a profit if the stock moved higher.  However, the next morning, it reversed direction and traded as low as $515.  I wasn’t feeling so great then, although I still expected to make a profit (albeit a smaller one).

On Thursday, the stock rose to about $525, just where it was when I bought the spread on Monday.  There was still $2.50 of time premium remaining in the Nov1-13 call which I had sold, so I was tempted to wait until it was due to expire the next day so I might pick up another $250 per spread when I sold it.  However, I decided to sell it at that time.

I sold the spread for $56.25, gaining $10.86, or $1076 per spread which had cost me $4539 on Monday.  That worked out to a 21% gain for the four days.  I was happy with that result.

On Friday, AAPL fell back to about $517 at the close.  The spread that I had sold for $56.25 was trading at about $53.  I still would have made a profit, but it would have been much lower than the one I took on Thursday.

The lesson here is that when the stock is trading very near the strike price of your short call when you have a spread like this (either a diagonal or a calendar spread), it is a good idea to sell it rather than waiting until expiration day of the short option.  While you give up some of the potential gain if the stock were to remain absolutely flat, you risk doing worse if the stock were to move more than moderately in either direction.

It is better to sell your diagonal spread whenever the strike price of your short option is very close to the strike price rather than waiting until the last minute to try to squeeze out every penny of decay that might be there.  In this case, I was wrong about the
stock moving higher – it fell about $10 and I still made over 20% on my investment for a single week.

                                 --------------------------------

     
Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.  Why wait any longer to make this important investment in yourself?

Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswimIf you open an account with our link, they will give you 60 days of free trading or up to $600, the same deals they give to everyone who opens an account with them. You must use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80).  You get $300.65 worth of services without paying us one penny.

I look forward to having you on board, and to prospering with you.

Terry

 


Follow Up On AAPL Earnings-Announcement Strategy

 
Overbought/Oversold report
    Overbought/Oversold as of November 5, 2013
 
• S&P 500 (SPY) – 57.5 (Neutral)
• Dow Jones (DIA) – 61.4 (Neutral)
• Russell (IWM) – 50.7 (Neutral)
• NASDAQ 100 (QQQ) – 81.0 (Overbought)
 
Testimonial of the Week


  I'm very satisfied and impressed with the autotrading as it's gone to date.  I couldn't possibly keep on top of the adjustments as you do.  I monitor the TOS risk graphs daily and enjoy reading the Saturday Reports.    
   ~  Walter 

     

Thank you again for being a part of the Terry's Tips newsletter. If you are interested in signing up as an Insider, visit Terry's Tips today for details.

Sincerely,
Dr. Terry Allen
Terry's Tips

 
 
Week 292

November 5, 2013
 
In This Issue
Option Trading Idea of the Week
Overbought/Sold Condition Report
Testimonial of the Week
Terry's Book

Hot off the press! Could be the best book on options you will ever read.

Order Dr. Allen's book "Making 36% - A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad" at the discounted price of $12.94 using the discount code TEE when ordering!

Think or Swim

A Chicago brokerage firm with the unlikely name thinkorswim by TD Ameritrade is our clear choice as the best of all option-friendly brokers. For openers, they have absolutely the best options software available anywhere, and it’s free!  They offer real-time option prices (bid-asked prices, sizes, volume, Greeks, etc.), and their trading platform is remarkably easy to use, even for complex spreads, and they offer a free Auto-Trade service so that you can have Terry’s Tips (or other newsletter) Trade Alerts automatically placed in your account without your having to place the trades on your own.  Thinkorswim by TD Ameritrade is the absolute best choice for the serious option trader.

Visit thinkorswim

thinkorswim, Division of TD AMERITRADE, Inc. and Terry's Tips are separate, unaffiliated companies and are not responsible for each other's services and products.

©Copyright 2001-2013 Terry's Tips, Inc. dba Terry's Tips