Here’s how I built a diagonal call spread on Apple (AAPL) (January 04, 2019)


I want to look at Apple (NASDAQ: AAPL ) today and this is why: We looked at this a couple times during the week; the stock tanked here. I was looking to buy this; in fact, I did shortly after the open on Thursday for a day trade because it traded slightly above the opening print. It was down, I think 7 or 8 percent definitely not 10 percent but it was down a bit.

If you recall I was saying as long as it is above the opening print then you should consider buying the stock for a quick little flip. But if it is falling don’t, because you are catching a falling knife. Look, this is a company that has a stock that is in decline. And if you don’t think the stock can fall below this and hit 130.00, you’re nuts. I am not saying that it is GOING to do that. I am saying that there is absolutely no rule that says that it won’t.

This is what happens with leading stocks when they finally roll over. When the big massive growth story is behind them as opposed to in front of them. There is nothing wrong with Apple (NASDAQ: AAPL ), they make billions. Warren Buffett loves Apple (NASDAQ: AAPL ), right? But nobody would argue that Apple (NASDAQ: AAPL ) is going to grow at a faster rate or a higher rate in the future than it has in the past; it’s just not going to happen.

Because of this, this is a stock that I would only be interested in trading, I wouldn’t be shorting it, but I would only be interested in trading it on little swing trades that might last for a week or two or for a day or two. So the one on Thursday, I lost a little bit of money on it. I was in and then the stock went up a little bit and then it flipped over and I realize, okay, I’m wrong and I am not going to sit here and be stubborn and say, “No, no, no, the stock is wrong, I’m right.” No, screw that. I was wrong, I didn’t want to be losing money, not on a day when there is money to be made elsewhere so I sold. Got out, that’s that.

This is what I want to describe: Today I’m looking at the stock, it gapped up a little bit. The market is strong so I am looking 145.00 and I decide over at Option Market Mentor, hey, why don’t we buy some calls? The 145.00 calls ending in February, I think there is like 43 days or 42 days remaining, so it is still in a time frame where the time value of these options is going to start evaporating fairly quickly.

The last 45 days or so is when you really see a lot of erosion in the time value. So that was about as short of duration as I would ever consider in buying calls or puts. I didn’t say it when I put out the trade idea because I didn’t know how far Apple (NASDAQ: AAPL ) would go. But my intent was always, if I got a movement in the stock, which we did, then I would come back today (I’m doing this on Friday), I would come back today and sell another call against it to lower my cost basis and REALLY take advantage of the time decay.

What I did was, we bought the 145.00 calls, February. Then the stock is up a couple dollars, I think it might have even been into the 148s, I forget. And then I said, “Okay, let’s do this,” I think we bought the 145.00 calls for about $7.30 and so the stock is up and I say, “Hey, let’s sell the January 150.00 calls.” That would create a $5.00 spread. Long the 145.00 calls, short the 150.00 calls, $5.00 between the two.

If the stock rockets right up to infinity we can buy at 145.00 but we have to sell at 150.00, which means that we better not have a cost basis in this that is above $5.00 or we are to lose on that trade. And so, sure enough, we are able to sell the 150.00 calls at a premium that was greater than the $2.30 on top of the $5.00 spread. Don’t let it confuse you; this is what I am talking about, I bought the 145.00 call for $7.30; $7.30 is exactly $2.30 above $5.00, which is the difference between the 145.00 and the 150.00.

So as long as the 150.00 calls that I SOLD were sold for MORE than $2.30 then my cost basis on the 145.00 call is less than $5.00, which means the worst case scenario is Apple (NASDAQ: AAPL ) goes to zero and I lose all my money. But if Apple (NASDAQ: AAPL ) starts to run a lot higher and for whatever reason I don’t get out of the trade I still actually make money even though Apple (NASDAQ: AAPL ) ran clear through my 150.00 strike price.

This is what we did on Apple (NASDAQ: AAPL ). Somebody, in the forum, had asked should we sell it, we got about a 10 percent profit? And I said, “No, instead we will do it this way.” So we raised the stop on this and we sold the higher strike call that is going to evaporate in time a lot faster than the February call.

So what are we going to do with this ultimately? I am looking for another one, maybe two days of upside. I still see Apple (NASDAQ: AAPL ) as a stock that is on a downtrend. I am just trading this counter trend rally for as far as it goes; then we will take that money and run. I suggest you do the same.

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