Thoughts on appleoption

[shisya]

Hi All!
I am newbie and I am looking to learn about investing in stocks and such. My handle 'Shisya' means 'disciple' in sanskrit. I obviously put a lot of thought into my name,now if only I can muster up enough brain cells to increase my depth of perception and help me with some stock picks... lol

I stumbled on these guys while surfing around Zecco.com. They are at appleoption.com and the following is one of their posts on their blog. What are your thoughts on them?


"The AppleOption Long-Term Portfolio (LTP) is positioning it’s holdings to sell premium!

We have decided to take advantage of this market bottom. Thus we are entering the 2010 LEAPS Apple Stock Option position. The plan is to sell premium between now and option expiration. The strategy will allow us to collect approximately $34,500 of profit from premium collected by selling options during this period. Therefore, we are risking $14,000 in capital, though will be on track to make 246% or 123% annually on this trade regardless of what Apple share price does in the next 2 years. Additionally, if Apple’s share price is greater than the LEAPS strike we will net additional gain from these calls.

If you are not yet a member of AppleOption, we encourage you to think about the possibility of the above trade. This is a long term portfolio strategy that requires very little maintaince on a weekly basis. It’s a business of leasing stock and collecting monthly rent. Join us today to learn more about this trade!"

Another one of their posts on their site said this,

"AppleOption STP - Trade Alert!
February 3rd, 2008, 11:58 pm. Posted under AppleOption STP, Trade Alert !! by AppleOption.

AppleOption is issuing a trade alert on the short-term portfolio (STP) that will result in a 25.9% return in the next 46 days.

Please Login or Register to read the rest of this content."

This does seem too good to be true.
Would very appreciate input on this from our resident guru's in here.


I gave a search in here for appleoptions but couldnt find anything. If this is a scam, may be we could have a seperate section called scams, where we list the different scams that newbie investors could get sucked into.

[wallstreetsedge]

welll basically all youre really doing is creating a spread every month.. a lot of people do it, i do it too..

rather than buying shares of AAPL and selling calls every month, you buy an AAPL leap and sell calls against it every month

[shisya]

The plan is to sell premium between now and option expiration. The strategy will allow us to collect approximately $34,500 of profit from premium collected by selling options during this period. Therefore, we are risking $14,000 in capital, though will be on track to make 246% or 123% annually on this trade regardless of what Apple share price does in the next 2 years. Additionally, if Apple’s share price is greater than the LEAPS strike we will net additional gain from these calls.

So they say they can make atleast 123% regardless of which way the trade goes. I am curious whats the downside to this deal then?? There must be something.

[wallstreetsedge]

well its simple.. they do something like buy 3 - aapl 90 jan10 calls .. which runs about $15k and your breakeven price about 140 or a loss of 20 points assuming it never moves... 20x3 = $600

now... assume the stock never moves.. they sell the 125 calls every month, giving you roughly $6.75 or 2025 or 4.5% x 22 months = $44550 minus your 600 loss which is how they get the number.. 43950 minus your initial 15000 and is 193% return

your downside is basically apple falling and your options being worth less or worthless... as long as you have the calls though, you can short almost any call creating a spread

but selling calls every month is a way to lower your cost average and cash on the table.. if you use a closer call.. say a mar 85 or 90 and sell a mar 125, the % is a bit higher..

buying a mar 90 will cost 3230

selling a 125 will get you 675 making you 20.89% in 43 days assuming the stock doesnt move or only goes up

if it goes to 125 by expiration, you make 29.25% in 43 days

[MrSer]

Apple calls at the moment seem very tempting. Go for in the money calls for reducing risk. I like the march 115 calls.

[wallstreetsedge]

Apple calls at the moment seem very tempting. Go for in the money calls for reducing risk. I like the march 115 calls.

if he's looking for something more conservative.. why would you mention an option so close to the security price having a huge inflection?

[MrSer]

if he's looking for something more conservative.. why would you mention an option so close to the security price having a huge inflection?

I never said for him to go out and buy them. I just commented and said that I like the march 115 calls.

[wallstreetsedge]

btw shisya...

another way to do it with a smaller return is to simply buy aapl on margin and sell calls against it every month.. the only reason why you would want to use options creating a spread would be its slightly less complicated with margin...

with margin you basically pay interest every month and its a 50% requirement so your basically buying aapl for $60 per share and paying interest every month on the remaining $60

when it comes to options, you basically pay for it up front.. and you can buy options closer to the current security price.. giving you more leverage

[netwrangler]

btw shisya...

another way to do it with a smaller return is to simply buy aapl on margin and sell calls against it every month.. the only reason why you would want to use options creating a spread would be its slightly less complicated with margin...

with margin you basically pay interest every month and its a 50% requirement so your basically buying aapl for $60 per share and paying interest every month on the remaining $60

when it comes to options, you basically pay for it up front.. and you can buy options closer to the current security price.. giving you more leverageAnd, shisya, this strategy is just covered calls on margin.

Covered calls are a great way to enhance your return from a stock.

Here's a link to a fair-to-middling description of the covered call strategy (http://www.888options.com/strategy/covered_call.jsp)

It's good to remember that information about strategies such as these is available for free - on the OTF and other places on the web. You don't have to shell out money to learn about this.

[shisya]

Wow. You guys are awesome! Thanks a bunch. :)

WallStreetEdge: That example does make a lot of sense and correct me if I am wrong here, 'assuming the stock never moves' or only moves up, would be an ideal condition to make $44K over 2 years.

However, what if the stock goes down and someone exercises their option. Wouldnt that result in a loss?

What do you think is their strategy for them guarantee that they can make money regardless of which way the stock goes?

[netwrangler]

Wow. You guys are awesome! Thanks a bunch. :)

WallStreetEdge: That example does make a lot of sense and correct me if I am wrong here, 'assuming the stock never moves' or only moves up, would be an ideal condition to make $44K over 2 years.

However, what if the stock goes down and someone exercises their option. Wouldnt that result in a loss?

What do you think is their strategy for them guarantee that they can make money regardless of which way the stock goes?Well, you have to see if they have their fingers crossed behind their back.

There is always a 'strategy' that works.

Covered calls work great for a stock that is going sideways to slightly upward.
If the stock is going up a lot, you have to switch to a 'rollout' strategy.
If the stock goes into a dive, it's time to buy back the calls, maybe buy some puts, and maybe bail on the position altogether.
The key piece of information is knowing when to switch strategies.
I've said in other threads, if someone offers you a guarantee on the market there are only two possibilities:

They won't honor that guarantee
The guarantee doesn't cover what you think it does.

I'm still waiting to see the guarantee that proves me wrong here.
[BTW: #1 and #2 are not mutually exclusive.]

[wallstreetsedge]

shisya - the answer to your first question is yes. if the stock moves up significantly and you get called out.. but you make money on your long call too.. so it balances out and you still make the premium.. if this happens, simply sell out your calls and buy the stock to cover OR just simply buy the stock to cover. then enter back into calls a few strikes below the current price or wait for a pull back before getting in.. and just do the strategy again

if the stock moves down.. its RARE that someone would exercise the calls because most likely it will fall below the strike price of your short call. if the stock drops - there are a few things you could do depending on how saavy and active you are. when i play spreads, i trade around the long position... what i would do in this case is simple...

lets say aapl is 125
i want to buy the aapl jan10 90 calls..
i sell the mar 130 calls

now lets say aapl drops to 118... rather than sit there and let the calls expire in a month, i would play around my long position by buying back the short mar before i expect a pop up. when the stock runs, sell another call against at or out the money

how appleoption does it is they probably just let the option go worthless so you get the premium - just to keep things simple. if the stock price goes down to lets say 105 by march expiration.. theyll probably recommend you to sell the 110 or 115, just so you can get the same % return for the next month.. its a bit tricky and i just prefer to play around a position especially if we're talking about alarge sum of money

if were just talking about a little bit of cash... i would say play spreads month to month instead.. the % gains are much higher and you have a smaller capital lay out


as for what net mentioned about a stock running up...

lets say aapl is 125
you own the jan10 90
and you sell the mar 130

aapl runs to 135, most likely i would sit and wait for those to expire and just pay the difference... making money from time decay is sometimes better than simply buying back the call because now the calls are at the money or in the money and have an insane inflection or implied volatility

some people would rather buy it back at a loss, and sell a higher call to lower their cost average which isnt a bad idea either but everyone does it their own way.. i just have different preferences compared to other people

[shisya]

Thanks wallstreet, Net!


I've said in other threads, if someone offers you a guarantee on the market there are only two possibilities:
They won't honor that guarantee
The guarantee doesn't cover what you think it does.
I'm still waiting to see the guarantee that proves me wrong here.
[BTW: #1 and #2 are not mutually exclusive.]


Thats lays it to rest. I would be disappointed to find out there was a guaranteed way of doing cash and I never found out about it lol.


WallStreet:
Your examples have really helped me understand how this works. Thanks for your patience and the explanations.