An Apple a Day?
Last time, we started talking about a simple method for trading Apple. We had closed all of our open positions and ended up out of the position.
After closing the 535 put for 5 cents on January 17, I opened a new position. AAPL was down about $15 from the previous day, so it was within the rules of our simple trade. On that date, a 540 put was sold for $5. This was closed on the 22nd for 50 cents, resulting in another profit of $450. Why close it for 50 cents? This was a weekly option that was opened on a Friday. The next Wednesday our $5 position had dropped to 50 cents with 2 days left and it didn’t seem worth 50 cents risk to the end. We had made $450 and a drop in the stock would have caused all of that to go away. These kinds of decisions have to be made based on past experience, mostly painful. Many times, I’ve had great profits evaporate overnight and have learned to take it when it’s there. It might not be there tomorrow.
Apple stayed around $550 for a few days, then suddenly dropped about $40 on the 28th. If Apple can drop $40 in a day, it can do it again the very next day. We decided to be patient and wait to see what happened next. The price seemed to stabilize around $500 and so, on the 30th, we sold a $500 put for $5. The next day was a Friday, so again, it was time to roll. The short $500 put was rolled out to the next week for a $7 credit, so we had taken in $1200 on an open position. On the 3rd of February, thinking that the price would remain fairly stable for the last few days prior to the dividend, we sold another $500 put for $7. We had taken in $1900 on two short 500 puts. Two days later, we closed them both for 90 cents each. $1900 – 180 = a profit of $1720! Again, we were out of the position. Why close on the 5th for 90 cents? The stock would go X-dividend on the very next day, and we had made over $1700 – Why in the world would we want to wait around and see what happens next? Actually, if we would have waited and held the position, the price never got near $500 up to expiration. The last $180 would have been kept, but we don’t care about that. Greedily trying to squeeze that last few dollars out of an option trade can be very, very costly.
Then, AAPL started a long, slow climb and we stayed out, patiently waiting. More next time.
Stay Optioned, My Friend!