AAPL has been the "baby" for many people who have wanted to jump on the bandwagon and profit from AAPL's wonderful business moves (i.e. IPOD, iphone, and now the future competitor of MS Vista).
Looking at the chart, I saw that AAPL broke resistance at 190 and used the 30 day moving average (blue line on chart) as a support line. Also, I drew the white channel lines that the stock has also been following. Today when I got in, there wasn't a perfectly bullish entry signal....instead, I see that there was a down day today on higher than average volume. This trade is riskier but worth the risk if I can adjust my position correctly and ride out the waves.
However, what I considered is that it's 30% about entry and 70% about the exit of any trade. This is the case especially for diagonals, since you are buying several months of time and selling against it for profit.
Stock at $194.90
I bought the Jan '09 150s for $65.85 and sold the Jan '08 195 for $8.85 for a total debit of $57.00= ($17,117.70 debit after commission)
Time Value Calculation:
In order to pick the best strike price to sell, you need to find out how much time value you are selling. This is otherwise known as extrinsic value or "fluff" in the trading world. Here's how to get that figure...
1st: figure out if you are ITM (in-the-money), ATM (at...), or OTM (out...).
If you are OTM, the entire credit amount becomes E.V. because there is no intrinsic value in that option.
If you are ATM or ITM, you take (Credit from sale of short front month option- Difference of 2 strikes).
In this case for AAPL,
-It cost me $65.85 to buy the Jan 09 150s so I subtracted the difference between the strike I bought and the stock (65.85-45) & divided that by 380 (dys to expiration of Jan 09)= $0.05 a day EV (amount I am spending per day)
-I made $8.85 to sell the Jan 08 195s. You take the stock price (194.90)- strike you sold (195)= $0.10, then I subtracted the $0.10 by the credit of $8.85 and divided it by 16 (days to expiration of Jan 08s)= $0.55 (amount I am making per day)
So in summary, it is costing me $0.05/day to make $0.55/day! AWESOME!
Max Profit:
If not called out: 8.85/65.85= 13.4%
If called out: 45- $57.00/57.00= -21%
Max Loss:
$11.41 max loss (20% loss of total)
Stop Loss set to $45.59= (credit of $17,007.30 after commission)
Exit:
Will roll into the Febs 1 week prior to expiration. Adjust my position as the month moves forward only if the stock is still in my direction (i.e. I have no signals of a trend reversal).
