Options Trading Newsletter - Issue #124
The X Factor... [Options Today...Bullish Trade on AAPL]
The X Factor… [Options Today…Bullish Trade on AAPL]
X has been synonymous with many things good and bad… Last week we saw that Twitter has now been rebranded as “X”, yeah… just “X”. Twitter formed in 2006 has over 400 million users and was bought over by Elon Musk for 44 billion, just under one year to wipe away 17 years of goodwill on the blue bird. This clearly shows that what is important in Twitter at least to him is not really the bird but the vehicle it has ie. the subscriber base and how he can carry the subscriber base for his plan to make it a “Super App”. The same way apps like “wechat” China has grown over the years, just starting as a social chat app into an app where you could get anything you could from online shopping, financial products, news and so on…
So do you have an “X” factor within your life that lives dormant at the moment? How could you revive it and make it do something purposeful? Everyone has the same resources in terms of time, ie 24 hours a day, minus 8 for sleep, the rest should be productive time applied to areas of financial, health or relationship. Most people are aware which areas could have an “X” factor that could be nourished but take little time to work on it. Lack of time could be most common excuse, but as said, we all have 24 less 8 hours a day, nothing more. Unless you could leverage that with efforts of other people, then that’s what you have. If it is important, then plan accordingly, if it is not, then don’t expect that anything will change.
Personally, I am also resetting my priorities this year. It’s going to be more work but do you think leaving behind what you have worked for past 17 years like Twitter had any relevance? It’s more on what that could come for the next 17 years by the change which is more important…
"Transformation reveals the potential for reinvention"
SPX (4582)
As expected the Fed has raised interest by another 25 bps last week. At a rate of 5.25% to 5.5%, such kind of interest rate coming from downright zero aver a year ago would definitely be painful for some, especially sectors or businesses which needs to borrow or has huge debts in its books. So it is surprising how businesses can survive in such an environment and that J.Powell has said that recession might not come.
The Fed has indicated that this may not be the last hike and again the standard answers our future decisions would be “data dependent”. Till the next meeting in September, there would be key data like CPI, Unemployment and GDP would be important deciding factor for the Fed. There’s nothing new as these factors have been the same, but despite SPX had rallied almost 20% this year alone.
We need to look at price action to trade and so far market continues to be bullish. Levels continue to be breached and close to hitting all time highs again. As the levels have been hitting higher highs, we could see some form of retracement inbound soon. Trading strategies could be skewed to sideway trading for now taking into consideration a rangebound trade both ways from current levels. 4500 to 4700 could be a good target for now.
This week, Manufacturing PMI on Tuesday, ADP Non-Farm Payroll on Wednesday and Non-Farm on Friday are key market moving data for the week.
SPX failed to break above 4600 level last week. Look for a retest this week, if not it could probably go down back to 4500 level.
The trading range for the week is between 4550 and 4650.
NDX (15750)
NDX is up 1.85% for the week, a change from last week’s down of 1%. From the price action, it seems that NDX las lost a bit of momentum as opposed to the past several weeks, where it always ended with a weekly high after a week of retracement. There could be heavy selling block waiting at the previous highs levels of 16,000 to 16,700 level.
Earnings season continue with MSFT meeting most expectation but lost on the growth estimate with regards to its Azure business. It came tipping to a low of 329 level last week. As for GOOGL and META, it’s another story of only good news as both was up last week by 10%+. Even TSLA had recovered by 4% for the week.
AMZN and AAPL earnings is up this week on Thursday. AAPL has been on a one direction up since February and the expectation would be high for its results to continue such price performance.
With pressure on continued earnings growth to sustain such upmove, perhaps the executives in AAPL would start to use the AI hype to give further uptick for AAPL value until it figures out what it really need to do on this space until the next earnings announcement 3 months down the line. Everyone’s using it so why not? Whatever comes, we could see AAPL support to be at 180 level and if we can structure any bullish trades at this level with high probability that would be great.
Watch for the 16,000 level, if NDX could break above this week. With the PMI and ADP early part of the week, we could see the direction ahead before the next impetus on big boys earnings AAPL and AMZN brings us next.
The trading range for the week is between 15500 and 16050.
HANG SENG INDEX (19916)
HSI popped last week gaining 4.4% which is something we have not seen for sometime for the index. The market is anxiously awaiting for the stimulus plan from the Chinese government to spur the economy. Although, the economic situation is not that good, any policies to stimulate market and print money would be a good run for the market. We could see HSI maintaining above 20,000 level for the week and move higher if this level is broken by end week.
As mentioned in our newsletter last week, we waited for a retracement to 18700 level for a bullish entry on MHI futures just the day before it went up exiting at 19285 as the gapped up was more than 3% then. We subsequently went short a couple of days later taking the temporary retracement downwards.
OPTIONS TODAY [Bullish Play on AAPL]
AAPL has been on uptrend for some months now and earnings is on Thursday. It remains one of the favourite stocks in the market and part of the Magnificent 7. Besides, it is also the top holdings by Superinvestors. The call by the Fed last week that there may be no recession also bodes well for consumer sentiment and launch of the new iPhone models coming quarter.
Price action wise, we could see support at 180 levels in case it flops on the earnings announcement. One Standard Deviation move for September month expiry is +/-$10.33, which means 180 is more than 1 SD move sitting at Delta 15.
Trade Entry
Bullish Trade on AAPL with the 15 September monthly expiry. Enter before earnings.
IV Rank is currently at 17.5, not significantly high, but hope it trickles up before entry.
Sell 2 short puts at strike 180 at support level for $1.42 each. Total premium collected $2.84 premium.
Buy an ATM $5 with Bull Call Spread. Buy a call at strike 200 and sell a call at strike 205 at $1.87.
The 2 short put is financing the Bull Call Spread. So if price goes up, both the short put and Bull Call Spread will go into profits.
However, if the price goes down, both the short put and Bull Call Spread will go into losses. If by expiry, APPLE is at 180, then the trade will generate $97 of profit.
Max profit is $597 if Apple ends up above 205 on expiry.
Buying power of around $5000. Return on Investment is 12%.
Max loss will be the price of the Bull Call Spread of $187 and the risk of the 2 naked puts at $18000 each, assuming AAPL goes to zero. As we look at support around 180, we see that the probability of losses is low as the trade has 85% probability of WIN.
Trade Management
As this is an earnings trade, anything can happen. We only enter this trade if we are comfortable that we would buy AAPL shares at $180 as this is a pre-requisite of a naked put position entry. So, even if price goes down and we go into immediate losses, we would hold the short put till expiry to earn the premium. We may close the Bull Call Spread if price action does not show that it will go up above $205 by expiry. Closing the Bull Call Spread will increase the net short put premiums earned as we finance less on closing the Bull Call Spread.
If naked put goes ITM, we either roll the trade to extend duration or pick-up shares and reduce cost basis by selling premium.
We could close the trade for anything above 25% of the max profit target. Roughly, we need AAPL to move up around $3.50 based on the trade Delta of 42.98.
Conclusion
We can increase probability of profit for defined risk trades like a Bull Call Spread by financing it with short strategies like naked puts. A single Bull Call Spread will only have 37% probability of profit, but mixed by 2 naked puts, the probability of profits will increase to 85%.
However, there are no free lunch. By adding the 2 short puts, the buying power will increase from $187 to $5000. Nevertheless, statistically, entering high probability trades over time will yield a more consistent results than cheap but low probability trades.
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.