Monday, July 23, 2012

Macro, Macro, Macro! & New Trade in AAPL!

It is amazing how quickly things can deteriorate when the big bad Macro comes knockin on your door. On Thursday the SPY broke out to new summer rally highs on increasing volume, AAPL was chugging along in its quarterly pre earnings move and had the look of a stock that wanted to test its old highs. But in spite of the percieved bullish move, the SPY closed thursday with a spinning top candle (for a explanation of Japanese Candlesticks see  )
The spinning top indicates a potential change in trend and the play is to follow which ever way the next candle breaks out. Friday was a very weak day, led by CMG's earnings disaster. This morning Spain is the lead story with 2 year yields near 6.5%. These are very bad numbers. Right now (8:25AM Monday morning) SPY is trading 134.70 -1..75 breaking below the lower trendline of thr rising wedge on the chart below. Not good! I was hoping for a relief rally this morning to get short SPY via some put spreads, but the market is not that accomodating. Shorting into a hole like this morning is a play that can yield explosive profits when right, but it's winning percentage usually makes it a painful trade, better to wait for a fadeable rally.  Support, if it holds is down near 132. While I expect some kind of rally before then it doesn't make much sense to play the long side with some special situation exceptions. The quality of that relief rally will tell us a lot about what we can expect as the the calendar turns toward August.

It was my intention to put on an AAPL trade today for earnings. This selloff may give me a better entry than expected. Right now it is trading under 595, round number support at 600 has been breached and it is a stock caught in the broad markets downdraft. I expect that it will, after the initial round of selling in the market dissipates, start to look forward to its earnings tomorrow, 7/24 after the close. Support in AAPL resides at 590, and resistance is firm up at the 618 level.

I'm a firm believer in spreads, especially in earnings situations. With that in mind a Butterfly in AAPL seems to provide a safe way to play not only a bounce in the general market but also ride any positive earnings numbers. So if AAPL can trade under 591 today, a purchase of the Weekly July27 595/615/635 call butterfly is enticing. Pricing in advance can be difficult preopening as option volatility can be a wild card on days like this. Maximum price to be paid for the butterfly is 2.50. I will not risk more than 1% of equity on this (or on any trade IMHO). So a $100,000 account would risk $1,000 by buying 4 July27 590 calls, buying 4 Jul29 635 calls and selling 8 Jul27 615 calls. Maximum risk the amount paid for the spread or 4 x $2.50 = $1000, below breakeven at 597.50 and above 632.50. Maximum profit of $1750 per spread ($7000) lies at the short strike of 615. Profit will diminish at the rate of $400 per point move away from the short strike, so a close on Friday at 616 would yield a profit of $6600. It must be noted that this position will require additional trades to close out as long as AAPL is higher than the lowest strike of 595 at expiration. Trade well!

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