Anatomy of a Trade: $AAPL 1×2 Call Spread

On Friday we initiated a trade in AAPL that took advantage of several factors in the recent action of the stock. Because the trade is influenced by so many different factors, alot of which are somewhat counter-intuitive I thought it would be a great trade to highlight for educational purposes. First, here’s the trade again:

TRADE: AAPL ($541 ) Bought AAPL DEC 570/600 1×2 Call Spread for .70

-Bought 1 Dec 570 Call for 13.90

-Sold 2 Dec 600 Calls for a total of 13.20 or 6.60 each

The imbalanced nature of this trade makes for interesting greeks involved and I want to highlight those, but first I want to touch on the rational for the trade idea. Here was what Dan wrote on the initial trade post:

TRADE RATIONALE:  While we are strongly in the camp that the days of AAPL’s parabolic moves are over, we think there is a distinct possibility that there is one more run this year left in the stock, probably back to what should serve as fairly decent resistance at $600.  The set up looks fairly decent here, as the company has recently come under significant scrutiny from a whole host of issues ranging from their recent results and guidance, product mishaps and availability, management shake-up, and general questioning of their ability to keep innovating at the same pace of the last 10 years.  For all of those reasons we think the stock will likely be range bound for a year or 2, but at this point we want to make a relatively defined risk bet (risk above $630 that I become short)  that the stock makes a near term bounce and move back to what we think may be the high end of the range going forward.

So what we were doing was making a slightly bullish bet. But with a structure that is actually short deltas. Let me explain.

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So to sum up, the structure has numerous ways to win, and only a few ways to lose, and with such little premium committed, has a great risk reward set-up.