Short July 125 AAPL put now under $1

Yes, with 22 days to go my short put has eclipsed the $1 mark. I looking forward to July 17 expiration and I'm hoping to receive a plaque from CBOE for my patience in holding an option to expiration.

An added bonus of holding until expiration is that if it expires worthless there are no closing costs, no further commissions. My brokerage, thinkorswim, does have a policy of making commission free trades to close out short option positions trading at under $0.05. It might make sense if it reaches $0.05 with a few days left, especially if I were to open another AAPL position going into earnings.

Sunoco

I have casually watched Sunoco over the past year. It looked enticing when it was approaching $20 last fall, but then it shoot back up to $30 and $40. I was left thinking, "Yup, would have been a good buy" and stopped following it. Well, guess what. That ship hasn't sailed. Yesterday it closed at $22.89.

I thought about buying it outright. However, even if it goes up to $30 or $40 again, I don't trust my ability to sell at the right time. I looked at covered calls, but the premiums there were not worth it. So, I've decided to stick to my guns and sell another short put. I sold the November 24 put for $3.51 this morning. If put to me I'll be buying in at $20.49 and sporting a 5.8% dividend yield. To which I could easily add a 10%/year yield selling OTM calls.

See, I'm not just an Apple fanboy.

Risk, Leverage, Diversification

My July 125 put is now less than 30 days away from expiration. I can see how an investor could be tricked into being overly comfortable as days and weeks go by in a leveraged position with nothing going wrong. The first day I sold the 140 Oct '09 put I was very nervous at being obligated to put up so much money towards AAPL. On that first day I could barely go an entire lunch without looking at AAPL's ticker. Now, I could go the whole day. However, the price of my 125 option has barely changed in those 2 weeks, why am I so much more comfortable?

I can see how investors (or should I say speculators) are lulled into a false sense of safety.

I would like to address why my portfolio is not more diversified. For one, I believe that asset classes such as US equities are much more tightly correlated than most believe. Second, I hate paying commissions. A $2.95 option commission for a $1,000 profit keeps my commissions expense ratio low (0.3%). Third, I don't have enough capital to be in more than a few companies. There are many companies I would like to own shares of long, although in this environment I would probably only consider a hedged pair trade.

Possible pair trades that pop into my mind are long Under Armour, short Dicks Sporting Goods or Long Chipotle, short PF Changs.

WWDC '09 Impression

Apple is trying to fuel investor confidence by keeping surprises, and thus violent price swings, to a minimum. Having Steve Jobs show up a few weeks earlier than planned to cause a short-term spike in AAPL price would be foolish. He will be back later as planned, investors like things to go as planned.

People love to second-guess Apple because the company has uniquely positioned itself to have a lot of opportunities. It is easy to point at something they could have done, such as an OLED screen for the iPhone.

Waiting another year before ditching the AT&T subsidy is also a case of maximizing profits, and minimizing risks. The risk being that incremental unit sales to Verizon wouldn't be enough to make up for the decline in profit margins. Apple can make drastic strategic changes through venturing into new product categories. However, they have consistently proven that they change product pricing, margin, mix strategies within each category very gradually.

Just look at how they gradually made the aluminum 13" macbook join the 'macbook pro' family. They gradually reduced iPhone's price, with the iPhone 3G at $99 (and the subsidy from AT&T unchanged) Apple is gradually sacrificing profit margin for market share.  

I think Apple is conservatively fairly valued in the $140-$150 range.  I am done rolling up my AAPL put options for now.  A new product release such as the much rumored netbook tablet, an AppleTV that is no longer a hobby, or the release of the iPhone in China might be reason enough to roll up the put $10.

Chased It.

I chased after the $140 Oct '09 AAPL option and sold it for $13.50. I didn't want to let it get away, and had just read about the possibility of AAPL releasing a $99 iPhone. I should probably close out the $125 July put, but I'll wait and see if I can handle the stress levels associated with being leveraged this much. There are only 45 days left until July expiration, and I really want to hold until then. If AAPL retraces to $125 and is put to me then I'll sell the Oct '09 125 call to reduce risk.

Just the fact that I wrote "I really want to hold until then" tells me that I'm holding this put based on emotions, I can't leave $270 for holding on for 45 more days (that's a free burrito everyday). If this position goes against me, I will remember this post, and learn my lesson... don't value your portfolio in burritos.

Synthetic AAPL

I know I didn't actually make a synthetic AAPL holding through options (for those too lazy to follow the link: I would have had to be buying the same calls as the puts I sold). After repeatedly moving up my naked puts during this rally, I'm sure many would say why didn't you just buy AAPL at $95. Well, I wasn't expecting a 50% rally in 3 months.

If my current AAPL $125 put were exercised I would enter an AAPL position with a cost basis of $114.81. I put in an order to sell the $140 AAPL Oct '09 put for $15, which is marked at $14 right now, and I expect will get filled on any decent pullback. Assuming the July put expires and the Oct 09 order is filled, if AAPL were put to me at $140 I'd still be buying in for $114.81.