Apple was butting right up against its all-time highs this morning.
It hit the upper edge, pulled back, and none of it looked wildly overbought. I would absolutely not fade that move. Even if I thought Apple was going down, I wouldn’t take a bearish trade there, because it has a high probability of getting squeezed into new highs, easily $349 or $350.
Meta shattered the upper edge of its expected move this morning, and I’m short Meta, so trust me, I noticed.
I’m getting Meta’d, and I think the same kind of squeeze is likely coming to Apple.
You can’t just buy any spread, though.
With Apple sitting dead center between 2 $2.50-wide spreads, one bullish and one bearish, the put spread was trading for substantially less than the call spread, and the reason is skew.
Buying the at-the-money spread was out of the question. If you pay $1.40 for something that can only ever be worth $2.50, the trade can’t mature, and you’d be waiting forever to get your money out. That is bad behavior on your part.
So I went out of the money with the October 16 $342.50/$345 call spread for 85 cents.
You’re paying 85 cents to make $1.65, with about a 30% chance of it being in the money, which is a lower probability trade with a much higher payout. It gives Apple 25 days, and earnings don’t hit until after it expires.
I routed it at 85 cents this morning. Don’t pay up, and if you absolutely have to, 88 cents is the most I’d pay.
Intel was doing the opposite. It has an inverted implied volatility skew, with at-the-money options pricing around a 70 vol and out-of-the-money calls pricing near 74, so puts sitting closer to the money were cheaper than calls sitting further away. It’s tail risk being priced in to the upside.
Making decisions like this has become second nature to me. But learning the process won’t take you long if you apply yourself.
In fact, I put together a checklist on how to analyze setups, decide which are favorable and which you should avoid.
And you can grab it today, at no cost.
To your success,
Don Kaufman
P.S. Somebody asked why I didn’t just use a $5-wide spread. A $5-wide spread puts a bigger gap between the option you buy and the one you sell, and the difference in implied volatility between them raises the bar on the trade. I want it tight, with as little implied volatility working against me as possible.
