Tuesday, October 5, 2010

Options on AAPL: Sometimes it’s better to be lucky than good.

I am going to be completely honest. For the last week I have watched every TICK on the AAPL charts. My eyes were on the verge of bleeding. I didn’t lose any sleep (the whiskey saw to that) but I couldn’t clear my mind. I couldn't get the weight off my shoulders. It was consuming.

I made a mistake, a big one.

I bought into AAPL at exactly the wrong time. I went long 10 AAPL Oct 290 calls at peak volatility in an up market. I figured the run to $300 was in progress and there was no derailing the train. No need to rehash the past (see previous posts) but AAPl plummeted in the next week. I compounded my error by trying to catch a falling knife. I went from being long 10 AAPL Oct 290 calls at $9.80 per, to long 35 AAPL Oct 290 calls at $4.90 per, and down $9,000.00. I was dollar cost averaging myself into the poor house. Day after day, the technicals were telling me to get out, but I was waiting for that one bounce to exit. It was two weeks until expiration and every indicator was telling me to sell- but I held on.

I pushed in again- doubled my position and DCA down to 70 AAPL Oct 290 calls $3.85. Monday was terrible and I was down $15,000.00 or so. As a normally disciplined value investor, you can see how troubling this was for me. I had dug myself in a gigantic hole and was starting to look at things in my house that I could sell to remain whole. I put on a happy face and kept plugging away at my day job, school and family. The whole time this trade/loss was eating at me.

I was confident the stock was due for a bounce, I just didn’t know how much more punishment I could take. It was trading at 14x forward cash adjusted EPS. 14! This is one of the greatest growth stocks in the S&P. The only barrier to entry in this stock is its price tag, if it were to split (say 5-1), the price would immediately skyrocket. None of these facts matter. It did not matter that it was getting upgraded daily. It did not matter that its international expansion was proceeding at breakneck speed. All that mattered was that BIG MONEY (hedge funds, MM’s) were exiting the position at the end of quarter for huge gains. The stock was in trouble. I was one day from folding, hey the world needs ditch diggers too.

Then came the Tuesday morning, and a rising sun from the east changed the whole landscape. Japan had lowered its rates and entered into its own round of QE. This was the spark that the market needed. We rallied over 20 points on the S&P handily breaking through the previous 1150 resistance. AAPL was up nearly 10 points. I had reversed my entire loss for a decent sized gain. I had gone from zero to hero in one day. I should be flying high, but I am not. I am merely relieved.

I learned an important lesson. I should never have tried to catch the falling knife. This is the type of trade that could have- and really should have- taken me out of the game. I was a rookie loading up on naked calls on a hot name. It was like moving all in on a flush draw. I knew if I got there (AAPL kept running), I had the market beat, but I was betting on the come, I did not have a made hand. I never would have made this bet in a poker tournament. If I missed my draw I was busted. I could not buy back in. I would be out of the game and permanently.

This is part of the reason I do this blog. I am documenting mistakes. I made a big one, and although I didn’t pay the price in dollars,I still paid a heavy price. Mark my words, I won’t make this bet again…… until I do.

So what did I really learn? Those who do not take risks do not deserve to succeed. I am not a ditch digger,  not yet anyways.




  1. I recommend at this point to buy Jan. $290's. You have plenty of time and will make a handsome profit with these. Good luck.

  2. Thanks- I agree that we are heading well north of $300 after earnings. Hopefully there will be a lull in the action so I can snag some deep in the money calls with low premium.... There are no called strikes in investing.

  3. This is a really fantastic post. I ahve always wanted to see what others do and the mistakes that they will ever admit to.

    I blew up 5 years ago on Currency trading when the Euro went for a wild swing. Never got back in the market until Apple came along with the video iPod. I knew it was a game changer. When I finally saw the iPhone, I knew that we had a company that had real vision. This company is what Microsoft was supposed to be. They are innovators and everyone else just copies.

    They have now turned all of that innovation into real money. I have been long a number of Leaps, which I buy once per year. I cannot fathom the daily or weekly gyrations so I get a Leap or two and I walk away. Strategy has worked for all but one year (you can guess which one that was :).).

    Thanks for sharing this. I think that this is wonderful stuff that you are putting forward. I for one am learning as you write. And I have been doing this for over 10 years.



  4. Thanks for sharing, I am in a similiar position. I am long 5 Jan 11 230 calls @ $66.22. I also bought "on the way to 300!" until last week hit. Monday added even more stress. As of today I'm almost even but I'm holding out for earnings. wish me luck.


  5. That's why I'm more interested in selling options than buying them. I'll let the other guy have all the headache!

    Great article. Tons of honesty and good lessons.

  6. So did you end up closing your position?

    I feel your pain, I lost $22K with Citibank in Jan this year using the same approach as you. At least AAPL is rebounding.

  7. Cobe- I closed most of the position for a small gain. I have 10 Contracts still on the line... playing with the houses money at this point. Lets see what the market bares.

  8. Monk- I'm with you. I am having trouble finding decent entry points for long term holdings. I hate to say it, but I am waiting for a pull back before putting my cash to work. I have about 20,000 on the sidelines.

  9. Craig, good for you. AAPL has been my lucky charm.

    Today I managed to make over $10k with AAPL within 5 hrs. I bought close to the low and sold just off the high.

    - BUY 120 - 280 Call Oct 6th (av $1.51)
    - SOLD 120 - 280 Call Oct 6th (av $2.43)

  10. Craig, have you considered selling puts on this market, or no? It can be a nice way to enter into long positions at more attractive prices, or to collect a decent premium if the market doesn't go down to those levels.

  11. Falling knife maybe but had you not done that you would have been killed by it. The mistake you made wasn't averaging down, that saved you, the mistake was buying in at the high assuming that it was marching to 300. If you made money you did the right thing -- if you lost you didn't.

  12. Cobe,

    @Cobe: I thought you weren't allowed as a "small" investor to buy more than 100 contracts? Or did you off load it by 10's etc?

    @Dividend Monk : Also, Naked puts/calls are just a way to tempt the devil. I would never recommend it. Been there, done that. Wore the same pair of shoes x 7 years because of it; also got an ulcer. Or were you venturing straddles or covered calls?

    Great discussion here by the way.


  13. FYI guys: I am not writing another article on AAPl. But I am long 5 Nov 270 and 5 Nov 280

    Im a glutton for punishment.

  14. hold you positions -- you'll make money -- it's the best play in the market

  15. hi craig,

    nice blog n i really like it.my name is edmund n i'm frm singapore. i invest n trade mostly in singapore n malaysia shares n currently i would like to trade in US equity market. I would like to know how is the tax being applied to dividend per share. Is the amount taxable or tax free? is the mid term election will affect the tax on ths thing? how severe will the market react on the mid-term november election? if the tax cut is not being renewed,will ths affect the dividend payout ratio for the companies? i hope u will able to brief me thru on ths..