AAPL $460 Call Follow Up and Update

Here's the P/L for the AAPL $460 calls opened last week which were meant to be a short term trade.

The P/L on this position came out to be a +26% gain, often people talk about 100-300% gains in options and I've experiences the same, the thing they don't tell you or they don't know at the time is that to make those kinds of gains with options you are essentially gambling and playing options like a lotto ticket, most of the time these fantastic stories of triple digit gains end only weeks or months later with the total destruction of the option account's value and I mean TOTAL.

This is why I tend to play options EXACTLY the opposite of the appeal Wall St. built in to them when they created this derivative product. Options have the allure of controlling a lot of shares for a relatively small amount of money and if you get lucky, you can see huge pay days, but that's where the hook is. I have a friend who is a commodities broker (the gains there can be very similar to options because of the leverage available) and he swears to me that 90% of his clientele are nothing more than "Degenerate Gamblers". He'll often tell them to take profits because he wants to keep them around as long as possible rather than look for a new client, but 90% of the time they'll say, "Let it ride" and he sees the same thing over and over, COMPLETE PORTFOLIO DESTRUCTION.

The approach I take towards options is the opposite of the allure built in to them. I only want to use options when I have a good signal, but the profit potential is otherwise missing, making an equity trade in something like AAPL not worthwhile, (tying up $450 a share to make 2.5% doesn't make sense).

I'll also lean toward quality instead of the "Out of the money" lotto approach that can pay off big, but the probabilities drop significantly lower. I also tend to go for an expiration that is much longer than the anticipated trade as the closer you get to expiration, the more Theta burn accelerates (Time Decay). In fact you can see the results of not having sold the AAPL calls just 15 mins. earlier today.

 

 At the fill of $8 this position gained +26% which is not bad for a few days, but as you can see, had they been sold 15 minutes earlier they would have produced a gain of +36%.

AAPL Update...

 The daily chart shows AAPL when it was > $700 and we had been warning, but AAPL longs at that point in time were hardcore believers that AAPL was heading to $1000. Something clearly changed quickly in AAPL and the entire hedge fund herd tried to fit out the door all at the same time taking AAPL down over 320 points or about -45%, nearly instantly putting AAPL in a Primary downtrend form a Primary uptrend just a month or two before.

We saw interesting behavior in AAPL and speculated it was forming a base for a counter trend rally (a rally against the bear market which is common around this mark, take a look at the 1929 Dow bear market's first counter trend rally which was nearly 6 months long and something like a 50% gain, the SPX experienced several counter trend rallies since the 2007 top, even in 2008 as the Financial Sector saw an interbank liquidity squeeze/Freeze that threatened even non-Financial institutions as GE said they had no access to funds and would need a bailout in less than a week if the banking liquidity freeze wasn't fixed. Banks swore that they had declared all of their subprime losses only to come out months or even weeks later and declare losses twice the size of their previous estimates. This period of time when no one was telling the truth about their exposure to subprime created what is known as "Counter-Party Risk" and banks that normally lent money to each other at the overnight rate stopped all lending to "counter-parties" as no one could be sure what the counter-party's real exposure / risk was which caused the liquidity freeze in the markets that saw giants like Bear Sterns and Lehman go down, AIG who insures half of all the planes in the sky was near collapse and even GE that had little to do with finance wasn't able to access short term lending to make payroll and normal business operations and estimated they were within a week from needing a bailout if things stayed as they were.)

 This is the daily AAPL chart with a classic head fake move off of what many were identifying as a bullish "Bull flag even though it didn't even meet Technical Analysis's definition, it was good enough for Wall Street to use as a head fake,

Technical traders expected an upside breakout, Wall Street created a head fake move to the downside which any AAPL longs would have been at a loss and selling which was perfect because guess who was buying in to the 6/28 low?

This 30 min 3C chart shows the first low of a "W" base and the 6/28 low after the head fake move, all the longs who had to sell at a loss as they expected price to do the opposite, were feeding Wall St. as they were accumulating in to the 6/28 low as can be seen above.

This is today's 1 min intraday chart showing AAPL's probability of downside.

Even if AAPL makes further gains in the next day or two, time decay (Theta) for options makes it very difficult to make greater gains, a long equity position is different, but it doesn't have the profit potential which is why we used calls.

*3C may give us a new entry on any accumulation of a pullback which we'd look to longer expirations than this Friday.

 The 3 min AAPL chart made the AAPL calls worth holding as you can see last week price was drifting lower, but 3C was clearly moving higher in to those lower prices on an intraday chart WHICH TELLS ME THE PROBABILITIES ARE HIGH THAT MARKET MAKERS WERE ACCUMULATING A POSITION JUST BEFORE AAPL TOOK OFF AS THEY WOULD HAVE KNOWN ABOUT THE LARGER POSITION ACCUMULATED AS THEY'D LIKELY HAVE BEEN THE ONES FILLING THE ORDERS.

You can see 3C distribution short term in to today's move.

The 30 min chart shows 3 of the 4 stages of a typical cycle with 1) Accumulation, 2)Mark-Up, 3) Distribution and the only thing missing is stage 4), Decline.

***We'll look for a new entry in to AAPL for a quick long, but more and more the counter trend rally is looking worse and worse so we may have a bigger picture long term short position developing.