Tuesday, July 16, 2013

Apple LEAP Position Closed/Suspended During Earnings Season

As last discussed here CCI has been  long the Jan $300 AAPL call, and has been selling shorter term calls against that leveraged position.  

Today CCI closed this position.   The initial rationale for this trade is that Apple has a good potential to trade sideways as the bulls/bears fight over the positive factors such as of a low valuation and negative factors such as the potential for competitors  driving downs their margins.  In general, CCI continues to believe in that thesis.  However, Apple reports earnings next week, and with that event comes the potential for short-term volatility in the stock price.  CCI (and most investors) really have no particular insight/edge as to contents of the earnings release and how the market might react to the announcement.  Hence CCI is going to move to the sidelines through the earnings period.

After earnings, CCI is still inclined to believe Apple will settle into a trading range.  CCI will be looking to re-establish this type of position (especially on a pull back in price) via a long Jan 15 LEAP and a short position in nearer term calls.

The position just closed was established on March 1.  During that 4+ month period of time
  • Apple stock essentially flat (down .5%) but paid dividends (1.3%) for a total return of just .8%
  • The CCI Index Covered Call (ICC) position collected a total of 10.8% in option premium on five different short call positions. However, the long LEAP position lost 5.2%.  Hence, overall, the ICC position returned 5.6%  
Returns of 5.6% vs. .8% is a good thing, but not as good as things could have been if Apple stock would have drifted just up a little bit.

Of course the risk profile for this long/short approach is not the same as holding the stock. Perhaps some reader would like  to calculate and compare a Sharpe Ratio or other theoretical  risk adjusted rate of return for the two alternatives.    However, from a common sense perspective, CCI is trying to offset the increase of risk from the leverage provided by the LEAP by holding short option positions, and a belief that the fundamental low valuation of Apple stock provides some sort of floor in the stock price. Hopefully, whatever the net amount of increased risk taken by that approach is worth the potential increased reward.
Over this short period of time, improving results by seven times seems like a good reward for the increased risk....but as they say....past returns are no guarantee of future results.

Stay tuned shortly after Apple earnings next week for a potential re-establishment of this type of position

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