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.

Best,

CM