More on the Old Mag7 – Apple

Yesterday I wrote about the turn up into the coming earnings reporting season for the Old Mag7. I left out a couple of names, most notably Apple ($AAPL) which deserves attention. Apple was moving along with Netflix ($NFLX) on July 1st when I entered trades for both. The Apple trade was a bit riskier though, a risk reversal. The set up in Apple was a move up off a pullback to the 100 day SMA and over the 50 day SMA. Both moving averages along with the 20 day and 200 day SMA’s are significant for my style of trading.

Also like for Netflix, momentum played a role with one gauge, the RSI, moving back into the bullish range over 50 and the second, the MACD, curling to cross up. These indicated a shift in momentum before an outright move to bullish.

The trade was a July 24 Expiry 290/July 17 Expiry 320 Risk Reversal. Cutting through the trading lingo this is buying a July 17 Expiry 320 Call and selling a July 24 Expiry 290 Put. The Call buy is driving the trade as it expresses an expected stock price move to the upside. The Put sale reduces the cost outlay, but also adds risk.

When you buy an options you can only lose the money you paid for it. When you sell an option you may be subject to unlimited risk (selling calls) or the full current price risk of a stock move down to zero (selling puts). This is because in selling a put with the strike price of 290 I might be forced to buy the stock at 290 on Expiry. There are mitigation techniques to avoid that risk, but that is a story for another day.

To cover this risk your broker reserves margin. In a margin account they may use an algorithm to calculate a safe amount and in a IRA they will reserving the full purchase price of the stock at 290/share. Obviously this is not a strategy for everyone. If you are comfortable buying (more) Apple stock at the put strike it makes it easier to trade.

This trade has worked out well so far with Apple back at its all-time high. Now Apple is approaching its earnings reporting date of July 30th and it is time to look at adjusting or adding to this trade. With the 2 day consolidation but momentum fully in the bullish mode I wanted to add more upside exposure and more time.

I can do this by selling the July 17 Expiry 320, and then also adding a July 24 Expiry/July 31 Expiry 320 Call Calendar. The net cost of the purchase of the July 31 Expiry Call and sale of both the July 17 Expiry and July 24 Expiry Calls is zero – no cash outlay to gain an extra two weeks of time and possible exposure past the earnings report. The trade off is that I am now betting that the price of the stock will not exceed 320 on July 24th.

This gives the option to hold the July 31 Call through the earnings report or to sell it ahead of that report when it will have high implied volatility.

I have started this series now with a fairly simple spread strategy and followed up with a more complex strategy. Tomorrow I will round out the week with a look at Meta Platforms ($META) with a reporting date of July 28th. Let me know which you liked better and any other comments.