Tuesday, September 28, 2010

Option Mondays: AAPL decisions, decisions.

Over the last month I have been actively trading AAPL options. I have been moderately successful (I think I have cleared over $3,500.00). On Friday I bought 10 0ct 290 Calls at 9.80 and 5 Oct 300 calls at 4.50. IT was early in Fridays session and the volatility was still high- simply put I paid 30-40 per contract too much. AAPL traded sideways for the remainder of the day and I took a small loss.
Monday was no better. A weekend of time decay and a .40 loss coupled by low volatility pushed my loss into the $1,600.00 range. I chose to hold tight, figuring we have 2-3 more days until the end of quarter and some money managers might push AAPl to 300.
Then, there was today…. We were up nearly $2 premarket, and then on market open the floor fell out from under us. I watched the stock drop almost immediately into the $275 range. I had no clue what was going on. My first thought was maybe Steve Jobs died at exactly 9:30 am, I quickly found out that wasn’t true. I took in the possibility of profit taking- but it couldn’t be to this scale. The Cook to HPQ rumors were ridiculous and HPQ’s stock wasn’t rallying so there was a disconnect there. The RIMM pad is cool- but Research in Motion was down 5% as well so that wasn’t it. I chalked it up to a HFT raid on AAPL. Cook rumors, RIMMs pad, they smelled blood and they turned on the computer early- bombarded the stock with sell orders, took out stop orders, and dropped AAPL by 20 points. I watched my AAPL options plummet 6-7000 in the matter of seconds.
These scenarios flashed in my mind in a matter of seconds. I decided the best course of action was to double down. I pushed in on margin and doubled my position in Oct 290 calls at a 4.80 price per contract. This dollar cost averaged my position down to roughly $7.00. SO as it stands now I am long 20 AAPL Oct 290 Calls at 7.02 per. There were points in the day that I could have banged out for a modest loss, but I chose to stick with the position. The fundamentals are there, its trading at 14X cash adjusted earning heading forward. It is exploding in foreign markets and it reports on Oct 18th.
The charts are starting to worry me.

In the last week we have run into two Dojis. The first was followed by a bullish engulfing- which normally signals an uptrend. The next day we came dangerously close to an inverted hammer, the last 30 minutes of trading salvaged the day. On Friday we Doji’d again- this really began to worry me. Especially since the weakness was during the large Friday rally. I decided to keep the position over the weekend due to the Target news and the China roll out. Monday was a bearish engulfing- usually signaling a down trend. This was confirmed today. AAPL went from being one the prettiest charts on the S&P to UGLY in the last 4 days.
The moves in the last 4-5 days could be a breather heading into another upswing. I believe the fundamentals easily justify this being a 325-350 stock. I am worried about the technicals and the possibility that a hedge fund has begun liquidating its position. The double drop on the charts today spooked a lot of investors.
I’m not sure how long to give this trade. I have at least one week before Im forced to make a decision. But that means holding this trade through Thursdays unemployment numbers and the possibility of an October sell off.
My head hurts. I’m going to bed.


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