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Options Theory: My Recipe for a Tasty AAPL Put Calendar

September 6, 2018

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Options Theory: My Recipe for a Tasty AAPL Put Calendar

I love a trade review as much as anyone. Looking over a trader’s shoulder to see why and when they entered a position is instructive. Watching it through to fruition is even better. How and why did they manage and exit the way they did? Are there tactics that you can apply to your approach that will improve performance?

In this week’s Tales of a Technician blog I mentioned a few tickers that I traded last month. I received a few requests to provide more detail. For those that aren’t already aware, I sometimes review these trades in the Cash Flow Clubs so you can usually find more information there.

For today I want to reveal how I played a put calendar on AAPL this week.

The Setup

On August 31st, Apple shares notched their eighth consecutive up day. Given such a relentless rise, the stock was overbought. This is the type of pattern I look for when using put calendars. I expected AAPL to pause or pullback over the coming days. On the implied volatility front, options weren’t as cheap as I would have liked, BUT I was willing to bet that if AAPL did fall in price that implied vol would stay aloft, if not move higher.

So, with the stock at $227.50, I entered a Nov/Sep put calendar for $4.62. I bought November because it expires after the next earnings release and the pre-earnings volatility build would help keep it’s premium aloft. I sold September puts because they still had sufficient premium to make them worth selling. Otherwise, I would have sold October.

The strike I chose was slightly OTM at $220. This set the trade up as mildly bearish making it well-equipped to handle a drop in the stock.

The Plan

My plan was to add a $230 put calendar (again, using Sep & Nov) if AAPL kept rallying to $235. That would have turned my position into a double calendar with $220 and $230 as the tentpoles of my profit tent.

My profit target was a 15% gain. Sometimes I go for 20%, but it’s hard for me not to bail at 15% if I get the profit quick. If there’s one thing I’ve learned with managing put calendars, it’s to take the profit when you have it! Overstaying my welcome to milk more of the potential gain rarely ends well.

Since I purchased the spread for $4.62, I was shooting for about a 60 cent gain. I placed a GTC limit order to sell the put calendar at $5.20.

The stock ended up rallying one more day, and then gravity took hold. Is anyone who knows how to read a chart surprised at AAPL’s pullback yesterday and today? Was it not painfully obvious that Icarus was flying too close to the sun?

With the downdraft, AAPL came right into the heart of my profit zone. This morning’s low was $221.30 bringing the price ever so close to my $220 strike. Additionally, implied volatility has increased over the past few days inflating the value of my put calendar. The IV Rank was at 52% at entry and is now 58%.

My order to close the trade was filled at $5.20 netting a 58 cent gain in a little over six calendar days. Really, this was only three trading sessions. Could I stay in and try to milk more profits? Sure! The management comes down to personal preference. I’ve just found that guerilla trading works well for my personality.

Place trade, take quick profits, redeploy.

Now, let’s see if the magical fruit can provide us with a clean bull retracement pattern to play some bull puts.

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