Actually it is a two-part question:
Question 1) Do you think Apple (NASDAQ:AAPL) will bounce back to higher ground?
Question 2) Do you have 260 bucks?
AAPL has been a high flier for some time. But as you can see in Figure 1, it recently hit a “bump in the road”.
Figure 1: Courtesy AIQ TradingExpert
What follows is not a “recommendation” but merely an example of “one way to play” for a trader who thinks that AAPL stock may bounce back to or above its old highs – but who doesn’t want to or cannot pony up the requisite $14,568 needed to purchase a “small” position of 100 shares.
The Out–Of-The-Money Call Calendar
There are many potential variations of what I am about to show. This should NOT be considered to be the “one best and only way.” But hey, it’s one way.
Hypothetical Position:
- Buy 4 AAPL Sep15 160 calls @ $1.28
- Sell 4 AAPL Aug18 160 calls @ $0.70
If entered at this price, the total cost before commissions is $260. This also represents the maximum risk if AAPL fails to advance.
The particulars are displayed in Figure 2 and the “big picture” risk curves in Figure 3
Figure 2: Courtesy OptionsAnalysis.com
Figure 3: Courtesy OptionsAnalysis.com
Now let’s “zoom in” a bit on “where this trade lives” (a phrase I first learned from Mitch Genser, a mentor of mine when I joined Optionetics a number of years ago).
What we are really looking for is for AAPL to (hopefully) bounce back up to its old high near $156 a share. As you can see in Figure 4, if AAPL does get backup to this price prior to August option expiration on 8/18, the profit on this position will be somewhere between $160 and $630, depending on how soon that price is hit. If AAPL rallies immediately the profit will be lower, if it takes its time the profit will be higher. In this position, time decay works in the traders favor at any price above roughly $150 a share.
Figure: Courtesy OptionsAnalysis.com
As with any trade a plan is essential for success. So here is a hypothetical plan fitting a hypothetical trade:
- If AAPL breaks down we will simply hold on and risk the entire $260.
- If AAPL rallies to $156 we will either close the position and take our profit OR look to adjust the open position to lock in a profit and let the rest ride.
Summary
I have no opinion as to whether or not AAPL will rally between now and August 18. But that’s not really the point of this example. The point is this:
For a trader who thinks that a stock that has been in a strong uptrend before a short, sharp decline will bounce back, this example highlights one way to play without risking large amounts of capital