How I Made 164% Today on Apple Options

by Darwin on July 20, 2010

 

Hi I'm Steve and I rule...

I made a 1 day gain of 164% today assuming Apple opens at or above the current after hours quote of $259.2 per share.  How?  Well, I used leverage on a purely speculative move (so don’t try this at home if you don’t fully understand the risks – namely that 2/3 of all stock options expire worthless).  This morning, I sent this Tweet (follow my Twitter for real-time trades and other goodies):

Just bought a 250 call July on $AAPL. I know, volatility high today, bit w earnings tonight I expect a huge move. Hedged w $QQQQ for Aug

How Did I Know Shares Would Spike?

At the time, Apple was trading in the low 140s.  With earnings expected for later in the evening, I knew shares were going to rocket one way or the other.  I posited that shares were going to move rapidly upward and I wanted to exploit this temporary dip in share price:

  • Apple had been in a range between 270-280 and shares had dipped in recent weeks due to antenna-gate.  I didn’t believe this would have a significant impact on iPhone 4 sales.  I mean, how many people really returned this much vaunted phone?  I’ve never even heard of anyone doing so on the web.
  • It was a quarterly earnings report and with only a couple days between launch on Jun 28 and quarterly close, how many could have possibly been returned anyway?  So, the quarter was going to look good.
  • I suspected iPad sales were going to be gangbusters and as we’d seen trending, MACs were getting the benefit of Apple’s other flagship products.
  • To me, it was still a $260-270 stock no questions asked.
  • Apple ended up crushing on both revenue and earnings.  The sold $1 Billion more than analysts predicted – a Billion bucks over concensus!  They hit it out of the park.
  • Shares rallied to 259.2 in after-hours.

So, How’d I Make Money?

I bought the shortest dated option I could since I didn’t want to pay for more time premium than I needed.

  • I bought one with a July 22 expiry.
  • I bought the 250 strike price since it was out of the money, so affordable, but close enough to the current 242 or so that it would not be unreasonable to see shares rocket past 250 on the earnings call.
  • I paid $360 for the call option.
  • Since shares are over $259 and there will be at least a few pennies of premium left on it, I assume the option is worth $950 [259.2-250=9.2 + 30 bucks in premium]
  • That translates into a 1 day gain of 164%

While an extra few hundred bucks isn’t going to push my retirement date up, it’s these little wins here and there that have my portfolio at an all-time high while the broad market is off significantly from both 2007 highs or even this year’s highs.  I routinely exploit market abnormalities for quick gains like this gold pairs trade I saw which was a sure thing, as well as shorting leveraged ETFs – (yes, I run ETFBase.com as well).  I routinely provide updates of Darwin’s Portfolio in its entirety, so follow my RSS for future updates.

*Oh, and on that QQQQ hedge in my tweet, I was planning on buying a hedge anyway, hence, the longer August expiry.  Since Apple comprises an obnoxious 16% of the ETF, I figured if Apple tanked, I’d make money on the downside as well.

There happens to be an OptionsHouse Promotional Code worth checking out as well!

{ 5 comments… read them below or add one }

Investor Junkie July 21, 2010 at 8:57 am

“At the time, Apple was trading in the low 140s.”
“To me, it was still a $160-170 stock no questions asked.”

That range would mean a $100.00 drop in the current price

Don’t you mean Apple was trading in the low 240s?
Don’t you mean $260-$270?

Reply

Investor Junkie July 21, 2010 at 8:58 am

With your profit, buy a new iPad :-)

Reply

Darwin July 21, 2010 at 9:41 am

Yes, sorry, got my hundreds mixed up! I just closed position at $1245 for 245% gain since shares followed thru today. You’re right, I owe myself an iPad! I’m just not an earlier adopter by principle though, maybe I’ll save it for 2nd gen!

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Jesse July 21, 2010 at 1:02 pm

That’s awesome! I’ve been meaning to research more into option trading..you puttin anything on BP? :)

Reply

Darwin July 21, 2010 at 2:01 pm

Actually, yes! I had bought an out of the money Oct expiry 35 strike call a few weeks back when shares were in the 20s. I also bought something like a 10 put. I figured the stock rockets back up into the 40s by October on well resolution/buyout news OR they declare bankruptcy. Looking as though the former. Right now, in the money a few hundred bucks, but I’m just hanging on for complete resolution. The market hates uncertainty. Once the issue is resolved, shares will rally. If a buyout rumor arises, that will drive further increases.

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