Hamzei_Analytics · @HFT_StockOption
8th Mar 2013 from Twitlonger
Apple vs. Spiders (AAPL vs. SPY)
As 2013 unfolds on we continue to maintian our bullish bias on the market. However, the price action in AAPL has provided an interesting opportunity that we want to take advantage of. As you can see in the graph below SPY (Red Line) has outperformed AAPL (Blue line) by a wide margin.
Our thesis is that over a protracted period of time, this spread will narrow. In order for this occur, one of the following scenarios must play out:
1) AAPL goes higher faster than SPY goes higher.
2) AAPL goes lower slower than SPY goes lower.
3) AAPL goes flat and SPY goes lower.
4) AAPL goes higher and SPY stays flat.
5) AAPL goes higher and SPY goes lower.
As you can see from the above mentioned scenarios, we are not making a directional bet on either AAPL or SPY. This trade will only target the spread between AAPL vs. SPY.
Given the price action so far in the market the risk/reward for this trade looks compelling for us.
This trade will be a longer term trade and therefore we will be using leaps. The reason we will use leaps is to have the least theta decay as possible.
We do not want to be short options therefore we will be using both calls and puts for our long and short positions.
This position, by its nature, may need a few adjustments as it is critical to keeps its options internals (aka Greeks) inline.
AAPL:
AAPL: Jan 2014 AAPL 500 Call
Cost: $20.10
Delta: 33
1 Delta Cost: 0.59
Imp. Vol.: 29.57%
AAPL Stock Equivalent: $14190
SPY:
SPY: Jan-2014 SPY 155 Puts
Cost: $9.50 X 2
Delta: -94
1 Delta Cost: 0.21
Imp.Vol: 14.8% X2
SPY Equivalent: $14548
Above you can see how we are calculating the size of the trade.
BUY To OPEN 1 AAPL Jan-14 500 Call trading at $20.10
BUY To OPEN 2 SPY Jan-14 155 Puts trading at $9.50
The Total Debit of this trade is $39.10
Day Order Only