Protect your Apple Stock through Earnings

  • Posted by on April 24th, 2015 at 11:04 am

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At Dragonfly Capital we trade a lot of options, including using options to take advantage of earnings catalysts. But we also hold long term positions and protect them through earnings using options. Today someone asked me about how to protect their Apple stock ($AAPL) for earnings on Monday after the close given that the options are so expensive.

My answer was simple. Put on a collar. Buying puts as protection can be expensive, especially into earnings when heightened implied volatility raises options prices. But using a collar can cut that cost significantly, often to zero or lower.

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For Apple, trading at about $129.50, one way to protect it would be to use a put spread collar. Buying the May 1 Expiry 129/125 put spread ($1.60) is a whole lot cheaper than just buying the 129 puts alone ($3.30). This gives protection to the recent support area from March and April. But you can lower the cost further by selling a covered call. In this case selling a May 15 expiry 136 call ($1.55) cuts the total outlay to 5 cents to protect your position. It limits your upside to a 4.6% maximum additional gain at the May 15 expiry, but you can always adjust the covered call higher and to a longer expiry.

We will likely have an earnings trade for this on Monday. You can join for just $199 for 3 months, or $618 for a year and I’ll throw in a signed copy of my book. Today is the last day for this promotion.