Track That Trade: April 22, 2013

A request for a specific trade from Chris.

One CTM iron condor in AAPL, entered just before earnings (23 April).
Use July options, 25-delta.

Today’s post is the announcement.
I will make the trade on Monday Apr 22, 2013.

Anyone who has a pre-trade comment: now is the time to have your voice heard.

Full Disclosure: There is zero chance that I will make this trade with my real money. ZERO.

Anticipated Trade Date: April 22, 2013

Pre-trade commentary

I do not recommend this trade. Please do not copy this trade with real money.

So why make the trade? Because it was requested by Chris and I hope we can use it as a learning experience.

My thoughts:

–We are swelling just prior to the news release. Most of the comments I read describe poor results, compared with one year ago. However, what really matters is how the earnings and forward-looking statements compare with expectations. There is a good chance that AAPL could really disappoint and I want no part of that. Yet, its history (with Steve Jobs at the helm) is awesome and I do not want to bet against a big price increase.

–When selling options into news events, we have to be wary of the big move. But we want to take advantage of the high implied volatility in the option prices.

    –To accomplish both goals, I prefer to sell longer-dated options, so trading Julys is acceptable to me. However, this is not the time to be a CTM trader, unless the true bet is that earnings will be right in line and that there will be no other surprises.

    –I am more comfortable selling much-lower delta options. I’d have to see the prices available when it is time to make the trade before I can know what they would be. However, I know that I do not want to be forced into an adjustment as soon as the market opens – after the announcement. If the price gap is large enough, there will be an instant and irrevocable loss. I see no reason to make that bet.

    –I consider earnings plays to provide plenty of opportunity for nice profits, but they come with high risk. There is no way to separate them. When playing is this arena, I want a high probability of success and a decent potential profit. Th game plan is to exit after news is released and after implied volatility declines. So, I an see no reason to open a CTM iron condor when one of the main reasons for trading that type of IC is to make an inexpensive roll down, if necessary.

Selling Vega or Gamma?

In the first comment below, there is the question: is this trade being made to sell vega or gamma? Of course we are selling both, but the driving force for me is the vega sale. However, there is probably no difference.

If we want to sell gamma into a risky situation (and I prefer not to do that), then we must be paid a decent premium. The only way to collect that premium occurs when options premium is elevated and that means IV is high. So if I need that high IV to sell gamma, it is vega that I am truly selling.

Please read comments below. They include an important discussion of why this trade

April 22 to Apr24

Oops. I published much of the following on the wrong page. Here is the current status.

Apr 22. 2:43 pm. THE TRADE

NOTE: This is a fictional trade, and far too risky for me.

AAPL = 400.50

Buy iron Condor; Credit $4.30

APPL Jul 350/360P; Jul 450/460C

Delta of options sold: 24, 24

I don’t have much to say. Earnings coming and I do not want to own this position. But let’s see what happens tomorrow.

April 23

I opened this trade one day early. That was unintentional. I thought the news was expected yesterday after the close.

It seems to me that $430 for a trade that I expect to be forced to adjust is far too little premium. I see this trade to be a gamble on earnings and not as an iron condor strategy.

Update Apr 24, 20013

Earnings released.
Stock down 3%. Not bad.

8:32 am
VXAPL closed yesterday: 43.28; this morning:30.54
AAPL = $393+
Deltas:25, 16

Estimated closing price (for anyone who would exit): $3.60
Profit would be small, $70. However that is a 12% return on margin.

I would hold longer, and we will continue to track this trade.

Update Apr 25, 2013

8:37 am

If this were my personal money, I would exit here. AAPL is 412, VXAPL = 30.33 and I would be bidding $3.30 to $3.40. For this page, I will continue to follow the trade, but I would never own it with my own money.

Update Apr 30, 2012

11:52 am
AAPL = $442
Short deltas: 7 and 44. Not exactly a comfortable position.
Iron condor: midpoint = $4.25

One of the trade plans called for not owning this position. That produced a nice winner.

The alternative calls for rolling down the call side, if in danger. So let’s do that.

Here are the call options from which we can choose the new short spread.

APPL calls Apr 30

APPL calls Apr 30



I would like to be short the 12 delta option, or the 510/520 call spread.
However, going for a bit more cash, I’m selling the 505/515 call spread, assuming a credit of 90 cents (midpoint = $0.93). In reality, I seriously doubt we have any reasonable chance to collect that much. I estimate that it would cost $3.90 to cover the current short spread.

Net debit for the adjustment: $2.97.
Remaining credit: $1.33.

VXAPL is 29 and off the recent lows.

I do not love this position.

Next: Plan to bid for the put spread @ $0.20, or maybe even $0.25 or $0.30 (expiration is almost 3 months in the future).

Update May 6, 2013

APPL is just under $460
VXAPL = 26.88

I would be bidding 20 cents for the put spread here.
The 505/515 call spread is about $1.25 to $1.45
Delta of short call = 19.

No action taken.

May 16, 2013

AAPL now 421

I’m pretty sure we covered the put spread at 20 cents. The problem is that without having a real position with real money is I cannot be certain.

If we did buy the puts, I’d be bidding to cover the calls today. Perhaps 30 to 35 cents.

Not knowing means I am holding the position as it.
Midpoint of current iron condor position is $1.26

Jun 4, 2013

AAPL = 448.70
VXAPL = 28.57
Remaining cash credit $1.33

Jul 350/360 put spread is 0.09 to 0.23. There is no real profit potential left, so if we did not cover this position earlier, I’d going to consider it closed today. I don’t know how much I would have to pay, but I’ll assume 18 cents.

Jul 505/515 call spread is .65 to .81.
This is a trader’s choice:

July is still too far away to carry this call spread naked. I’d prefer to exit, locking in a small profit. I could be 70 cents and wait, or 75 cents and expect to be filled.

For those choosing to hold, there are again two choices: Hold unhedged, or sell a put and collect approximately 75 cents to become ‘dollar neutral.’

I declare this position closed because there is no skill involved in managing this position. We either hold the naked call spread or we don’t. I prefer not to hold when my reward is only another nickel or two. The risk/reward is all wrong for that. It may make sense for some traders to hold for another 50 cents, but I am not one of them.

7 Responses to “Track That Trade: April 22, 2013”


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