AAPL Repair Strategy Example

2013-04-06 15_35_12-AAPL - SharpCharts Workbench - StockCharts.com 2013-04-06 15_33_14-AAPL - SharpCharts Workbench - StockCharts.comThis article outlined my recent experience on employing repair strategy on my options trade that went wrong. The trade is on AAPL stock and the timeframe used was 1 week. This happened between 26 Mar 2013 to 4 Apr 2013.

26 Mar 2013: My initial analysis on AAPL on that particular date was bullish. The trade was speculative trade during a low volatility. I entered the trade buying 1 contract of AAPL AprWk1 470 C. This trade costed $777,98 ($765 premium + $12,98 costs). As I was unsure about the direction of the trend, I hedge my trade with AAPL AprWk1 465 C for $677 ($690 premium – $13 costs). The objective of this second leg is to reduce my initial trade costs and to gain from time decay. Thus my net position on this spread is debit $100,98. Margin required for this transaction was $2000 (485-465 x 100).

27 Mar 2013: AAPL price action went against my initial analysis; it reversed lower than the previous day! On this short timeframe, option time decay also hit my long trade very hard but profitable on my short leg. The long call current value went down to $1,31; so I decided to close the position at loss. I closed my long AAPL AprWk1 470 C for $124,48 ($1,31 premium – $6,52 costs). Net impact to my account is: loss $653,50 (buy for $777,98 then sell for $124,48) from 1 day trade.

Now, if I want to salvage my loss from this initial speculative venture, I must capture some premiums on this bearish move. I decided to employ bearish call strategy on this trade. The strike price selection will determine whether the net spread trade would be debit or credit. As the bearish move seems to pick up momentum, I decided to long OTM call + short lower OTM call with the same timeframe. In effect creating credit vertical call spreads. My long OTM call will be used as anchor point to pair my short lower OTM call which would provide my cashflow during this repair trades. So, the core idea was to capture time decay by employing bearish call spread. Your margin requirement was calculated by the difference between your call strike price legs. For $5 difference you’ll need $500 margin.

I closed the long 1 contract AAPL AprWk1 470 C trade and  replaced it with a relatively cheap 1 long AAPL AprWk1 485 C which costs me about $41,50 ($35 premium + $6,5 costs). This trade will enable me to short call options to recoup my loss on the initial trade.

At the same time, my short AprWk1 465 C now only worth $2,07. I decided to realize this profit by buying back the short call for $213,50 ($207 premium + $6,5 costs) and rolled the short call to lower strike price at 460. I captured $463,50 profit from this trade. Now the total impact to my account after this transaction is reducing my loss to $190. My new short 1 contract AAPL AprWk1 460 C brought in $318,48 ($325 premium – 6,52 costs). Margin required for this transaction was $2500 (485-460 x 100).

28 Mar 2013: I closed AAPL AprWk1 460 C trade for $148,50 ($142 + 6,5 costs) and rolled into lower strike price 455; capturing $169,98 profit. Total impact to my account after this transaction was reducing my loss to $20,02. My new short 1 contract AAPL AprWk1 455 C brought in $226,48 ($233 premium – $6,52 costs). Margin required for this transaction was $3000 (485-455 x 100).

1 Apr 2013: I closed AAPL AprWk1 455 C for $105,5 ($99 premium + 6,5 costs) and rolled to lower strike 450; capturing $120,98 profit. Total impact to my account after this transaction was net profit to $100,96. I’d recouped my initial loss and somehow managed to capture small profits on these trades! As the bearish move continued, I rolled the short call into lower strike 450. My new short 1 contract AAPL AprWk1 450 C brought in $264,48 ($271 premium + $6,52 costs).

 4 Apr 2013: I closed AAPL AprWk1 450 C for $30,5 ($24 premium + $6,5 costs); capturing $233,98 profit. Total impact to my account after this trade is net profit $334,94! The last trade was to close my long AAPL AprWk1 485 C which had became my anchor point to short call against. The value was practically expired worthless, netting loss $41,5.

The last trade on this series of repair strategy was completed with small loss of $41,5 thus reducing my total net profit to $293,44.

NOTES:

  • When adjusting short options, replace them with more expensive options, for net credit.
  • When adjusting long options, replace them with cheaper options, for reducing capital used.
  • Repair strategy should be used on the same timeframe as the initial trade.
  • Tap around the strike price, up and down, to effectively capture time decay.
  • Watch your margin requirement when adjusting the trades! The basic rule is the spread strike price difference x 100 will be your required margin.
Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s