My sanity was questioned in some comments last week when I sold a naked put on AAPL. The charge might be fair, but not because of this trade. I charted it again today during lunch.
On the left side of the chart you can see volume by price. It shows the heaviest volume between 120 and 140. That doesn’t mean as much to me, but one of the comments mentioned volume, so I included it. I welcome the education by someone who can explain it better than I can.
I also drew two horizontal trend lines around 115 and 119. Those were the main support lines I based my trade on and the upward trend of higher lows just added support possibly. That line broke a few days after I entered my order and that coincides with the day my order hit. When I put my order in I thought the horizontal lines would be the ones to finally offer real support. The first one did (so far), but I’m still in my position. Another line of support I didn’t draw is pretty much dead on 100.
With the theory that AAPL would drop to around 115 worst case I decided to sell the 115 strike. I figured volatility would spike some when it dropped and raised my limit to $5 for the option, which would bring my cost down to $110, not counting commissions. That gave me the initial cushion I needed to make the risk worth it for me. If I am wrong and AAPL goes all the way down to the 100 line I didn’t even bother to draw I’d sell another OTM call. Typical premiums for $5 OTM for AAPL are at or above $5 just one month out and over $8.50 two months out.
That means that if AAPL follows the worst case scenerio the current chart offers it’ll close at 100 on the day it’s assigned to me. I would expect a bounce from that line, but if it doesn’t I’d sell the 110 call and bring my cost down to around 105. I could have waited for AAPL to drop further, but that’s not how I trade. I accept the risks of making mistakes. If I didn’t, I would rarely make a trade. I’ll lose on some, but expect the good to outweigh the bad.
For fundamentals, it’s hard to find a good comparison to AAPL. DELL is in more of a commodity business. iPhones, iPods, Macs (are they still called that?) might have competition, but not like a PC manufacturer does. AAPL still has good profit margins and the iPhone is just about to hit Europe. Throw all that aside and there’s still an emotional attachement to AAPL for many and I expect it to stay afloat for a long time, which to me is at least through my option’s expiration.
Clearly I’m not right with all of my trades, but it’s fun to try.
I agree! I thought that downside support was at the 115 level. I unfortunately was assigned at a higher level and have been watching rather closely to write covered calls or if it dips downward to sell some more puts at pretty much the same level as you did. With its volatility I have been hesitant to write the calls thinking that I’ll be assigned. As you see, I too, have an emotional attachment to AAPL. It may go a little sideways for a bit but one never knows!!! Keep up the good work!
I never questioned your sanity. I just said it’s easy to get trampled by a stampeding herd. 🙂
And the herds have been stampeding…and likely to do so again.
Mule – Maybe I was questioning my own sanity then. lol – gotta love playing AGAINST the emotional herd though.
JGoldstein – you’re right, no telling when it will rocket back up, but if it gets near 140 again too soon I could see it coming back down quickly.
I agree with you about the margins. AAPL’s multiple is much better than DELL’s for two reasons: future growth and margin. However, both cannot come true. To grow at the CAGR needed to support the multiple, their margins are going to get hurt. That is, if you want to sell to the masses, get ready for leaner margins.
The only way to make the big premiums is to sell against the herd.
This may very well be a great trade. I just don’t see AAPL as the sort of stock I want to own for 10 years. GE or JNJ or even maybe AMZN. AAPL has been cranking out hits and that has made everyone forget the Newton days when they kept cranking out suck. Reversion to the mean could happen. AAPL just needs to be average for the froth to get squeezed out.