Dumped FB for AAPL Naked Puts

It has been more than a year since I made a trade on Apple (AAPL) and that changed today.  I was excited when AAPL shares split 7-for-1 early last month because I knew I’d be able to get back in with options without putting up $40-50,000.  I didn’t jump on the options last month because I was curious how the shares would behave with so many novice investors involved.  It ended up being a non-event, just like it should have been.  I didn’t take the time to watch AAPL as carefully as I would have liked since the split, but got back to it today.  While AAPL was trading at $96.50, I sold one AAPL September $92.50 naked put for $2.38 and received $237.50 after paying $0.50 in commission.

I thought about being more aggressive and trying for the $95 strike puts, but AAPL has had a great run over the past few months and it’s probably due for a little retracement.  I’m confident it won’t collapse and am willing to take an assignment on short-term weakness.  If the shares fall towards its 200-day moving average, close to $80, I’ll have to add to my position.  For one, I’ll be able to dollar cost average in at a much cheaper price and I think a 15-17% correction is the most AAPL is going to see this year, if it even gets a 5% correction before my option expires.  Picking the expiration month was easy.  The September expiration date is in the “sweet spot” I like to target, around 8-9 weeks out.  Options aren’t too cheap yet, but right on the cusp of having time value start to erode much quicker, if all other inputs were to remain the same.

My original limit order was going to be for $2.33, but then the share price started to drop from its opening highs and the premiums crept higher.  I saw that I could get a 14.01% annualized return if I sold the contract at $2.40, so I started there, in the middle of the bid/ask prices at the time.  I should’ve left the order in place and moved on, but after less than a minute I saw AAPL reversing and I dropped my order by two cents so I wouldn’t miss the trade.  It hit within a few seconds.

That’s one of the downsides to being as under-invested as I am right now.  I don’t feel like I can be as patient with my limit orders because once I decide I want to be in on a stock or ETF, I want to be in then and not risk missing the chance to pull in a few hundred more dollars.  When I’m close to 100% invested or over-invested, I’m more patient and can let the trades come to me with higher asking prices on my limit orders.  Once my July UWM positions expire in a couple of days, I’ll be around 70% invested, not counting my SPY hedge that’s 9% out-of-the-money.  That’s far too little invested right now.

AAPL Naked Put Risk/Reward Breakdown

  • Potential profit: $237.50
  • Potential return: 2.57%, 13.91% annualized
  • Breakeven price: $90.13
  • Downside protection: 6.54%
  • Recent high: $97.09, hit this morning before my trade hit.  It’s been nearly 22 months since AAPL was last at these levels.
  • Cushion from recent high: 7.17%
  • Expected support: I drew a weak trend line around $94.30 and am interested to see if it’ll do anything.  The June low bottomed just under $90 and the 50-day moving average is just over $90, so this will be an important area to watch and where I expect support to be strong.  Worst case, AAPL could trade down to its 200-day moving average around $80 (and rising).  I don’t expect the 200-day moving average to come back into play until the moving average has moved much higher, but it could happen.
  • Position close goal/limit:  I’m planning to ride this put out to expiration if it’s close.  I’ll close it early if I get the opportunity.  I don’t mind taking an AAPL assignment on one put because it’s less than 9% of my portfolio in this account and should do well into the fall when they make a new product launch (iWatch?).

I’m still trying to beef up my overall exposure, but I went in the other direction when I had a great opportunity to exit my Facebook (FB) naked puts this morning as the share price edged a little higher.  As the stock rose and fear from yesterday’s (Janet Yellen induced) little decline faded, the put premiums fell below $0.30.  With only a month to go before expiration, I had to get out early for an easy, quicker than planned profit.  While FB was trading at $67.70, I bought to close my two FB August $55 naked puts for $0.28 each and paid $57.58, including $1.58 in commission.  At $0.28, I only had a half of a percent of upside potential remaining (5.66% annualized).  Even though I had a buffer of 19.16% before I would take a loss, there was little reason to leave the exposure in place rather than looking for another new, more lucrative position to trade.  In years past, I would’ve let this put stay in place to expire worthless, but I think that closing these cheap puts early will benefit me whenever we have a sharp decline.

I’m going to keep watching FB and plan to sell another naked put again, but want to see it come back towards the lower end of its trading channel first.  I created a trigger to alert me if FB falls below $65.00.  Support might be closer to $64 and I want to be ready to react as it draws in closer to my target.  I’m not entering a new order yet, because I’d like to see some support before I jump back into the high P/E stock.  I don’t think it is done moving higher and will be happy to jump in again when fear pushes it lower without enough valid long-term reasoning.

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  1. Comment by Patrick Smith

    Alex, first time read of your site and I like all the detail on your trade. Really makes it easy to follow your thought process. I’ve often heard 30-45 days is the sweet spot for Theta decay, but you mention shooting for 8-9 weeks. Have you looked at shorter time frames? If so, can you explain a little more why you choose the longer timeline? Thanks!

  2. Comment by John Cash

    Hi Alex,

    I noticed that you have started your own business as a investment advisor. Even though I have started my option trading later in life, like yourself, I have traded options about 3.5 years ago. I also have my own shares of rookie mistakes and have learned from them. I am holding a full time job right now as an engineering manager. If you don’t mind, I would like to seek your advice as to how I can successfully switch to financial investment profession full time.


  3. Comment by Alex Fotopoulos

    @ Patrick, I like going out a little farther than conventional wisdom because I like a higher premium. By going a few weeks farther out than just a month or month and a half, I get that little bit extra that makes the downside risk more palatable. The final few weeks will get the fastest theta decay, but the weeks 4-9 are still much quicker to decay than weeks beyond 9 weeks. It’s almost like splitting hairs, but in such a low volatile environment like we’re in now, the one month out premiums are too cheap for me in most cases and going out to three months doesn’t add a great deal in most cases.

    @ John, I’ll email you directly.

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