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October 26, 2012 / redman59

Staying Light and Earnings Trades in $AAPL and $AMZN

Last night I posted in how I have no plans to go either way with this market as there seems to be a lot of tug and war and direction is not clear.  Today my morning consisted of morning admin catch-up that I usually save for the weekend.  But the morning action was a recording of previous days of where we saw a gap up followed by selling.

Today I did see a nice opportunity in $CRM as it was selling off and placed an order  for the 140/130 Bull Call spread at the mid of 2.65 credit.  This was to take advantage of the expected volatility decrease on a rebound off the 200 SMA and 142.50 support level.  Well this was the bottom and I  never got the fill.

Then obviously we had the news stock of the day of $AAPL that was set to report earnings.  I had no desire to take on an earnings trade but the more I looked at the chart, the more I starting looking at options strategies coupled with the chart.  In the end I placed an order and was filled 2 minutes later on an $AAPL Nov/Oct4 550/580 Diagonal spread.  In this spread I sold Oct4 580 Weekly Calls (expiring tomorrow) and bought the Nov 550 Monthly Calls for a 29.20 debit.  Usually I do not risk this much in an earnings trade but when looking at the chart and what the Risk Profile showed me, I liked the trade.

In this trade I looked at 550 as the max move to the downside.  I thought this was a safe max move and anything further than that and I find it hard to believe that there wouldn’t be buyers.  If $AAPL saw a move to the upside then at a minimum I would have made $80.00.  If we did see an extreme move to the downside, then I had 2 more expirations to roll the short call to reduce loss/cost basis.

More on my downside thesis.  $AAPL is a stock like no other.  This thing is a growth stock with awesome fundamentals.  Into the close it was nearly 14% off the highs with a tape that is not healthy.  So my thoughts going in were that expectations are high but this stock is still putting up numbers to make any company envious and the fundamentals in regards to price to growth, margins, and returns on assets/equity/investments are impressive, also there is no debt and the cash hoard is almost stupid to believe.  Needless to say it is an awesome stock fundamentally that has seen “wanting to get in on selling” even before the earnings.  Also on a technical basis with it coming into the 200 SMA and support levels if we saw more downside, it is just hard to believe that buying would not ensue.  Below is the 4 year chart to show some of the 2008-2009 calamity and how $AAPL has performed since hitting the uptrending 200 SMA (purple line)

So with this I went in wanting to get in if we saw a drop while also taking in some weekly profits if we saw an upside move.  So the Nov/Oct4 550/580 Call Diagonal made sense to me.  It takes advantage of the 580 call volatility crush while the 550 Nov call would not be effected as much on a volatility basis.

The Risk Profile and chart can be seen below with notes:

Also during the day I bought the $AMZN Nov 205/210 Bull Call spread for a debit of 3.75.  The thesis was kind of the same minus the fundamental thoughts.  I liked the chart technically and looking at support levels this made sense with the thought going forward that if we saw selling, I had two more expirations to roll the short calls.  Also this would take advantage of any positive earnings reaction.

After the close both companies released earnings and the price action made volatility sellers look like absolute geniuses.  The price action was gratifying to watch in both as both sold off right away.  $AAPL crossed below that 200 SMA and never looked back.  The hindsight thought now that $AAPL returned to its close after some selling is that the selling since Sept options expiration is priced in.  $AMZN moved up to an important support level and is hanging right there.  Should be an interesting day tomorrow and as of right now the $ES_F is -11.25pts (-0.80%) from the close and the tomfoolery continues.

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