This article was last updated on June 26
This is the second in a series of posts about Tony Parker’s option trades based on his prediction that the market has bottomed. His previous trade on QQQQ (Nasdaq Index) calls was quite profitable in a short period of time, but with volatility falling the return to risk ratio from buying options on indexes is not as attractive. Hence, Tony has decided to play specific stocks that tend to be volatile; on which options are most effective. Apple (APPL) was a prime candidate. Readers of the site will know that I already own Apple Stock, bought at a much higher price, so I will be watching this trade with interest while I wait for a rally in the stock. Here is Tony’s rationale behind the purchase of Apple call options and potential outcomes based on discussions I had with him after the trade.
Why I am buying – Upcoming Drivers and Impact
1. Mutual funds are required to “close-out” their books by Oct 30 of each year, therefore all the tax loss selling will be over tomorrow – POSITIVE
2. AAPL is currently “cheap” vs. it’s historical valuation – POSITIVE
3. I believe election excitement will give people hope and drive the market higher in November – POSITIVE
4. The credit market’s are starting to unfreeze which is good for the economy. Remember the market is looking 6-9 months out. – POSITIVE
5. AAPL has “run-up” every year for the last five years through Dec 15 (once) or Jan 15 (four times, because of their earnings report), this trend should continue given the value in the market – POSITIVE
6. We are still in a bear market and another sell-off may come (hard and fast) – NEGATIVE
7. The Christmas shopping season may be really bad (although, I think that is already priced in) – NEUTRAL
8. If you want out of your Hedge fund by year -end, you are required to inform hedge fund company by 11/15, therefore “forced” selling by hedge funds should stop after mid-November – NEGATIVE until 11/15. POSITIVE after that.
Exit Strategy and Possible Outcomes (based on stock movement)
Outcome 1 – it moves up $10 or so within the next week or so, we get out after making a couple hundred dollars
Outcome 2 – I am relatively patient and AAPL creeps up by $20 or so before year end and the underlying option price doubles, then we get out with around $500 in profits.
Outcome 3 – Wait until right before the next earnings report (point 5 above) and hopefully it has run-up by $40 or so if previous trends continue, then we get out with close to $1,000
Outcome 4 – it drops and we lose some or all of our investment! [Goes with the risks of options trading]
Disclosure: The order for the April 2009 $190 APPL calls was placed yesterday. 5 contracts were bought for an outlay of around $680. Options trading is a high risk trading strategy and should not be pursued until you are comfortable trading equities and have done your research. For a comprehensive introduction to options see this recent article.
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