PCCRC on AAPL

After a few days on rally, I made good money on a PCCRC I had on AAPL at 47.5. But I am still bullish on AAPL so I don't want to be out of the stock. But, what can one do with a runaway stock? As long as certain conditions are met, we can place a PCCRC on AAPL. If it suddenly reverses on me, I should be OK.

1. Earnings: AAPL just reported earnings so we are NOT going to be selling much volatility right not. Since AAPL is reporting in Jan, and Jan exp. is not really being focused on, I will use Jan ATM calls and puts for the long legs of my PCCRC.

2. Volatility: AAPL volatility is low right now, since they have just reported earnings. However, this is likely to increase as we approach the holidays and into the new year.




3. IV/SV ratios must be below one, and preferably about to turn around and go higher. This should help our trade and protect us against a volatility crush.



As long as this conditions check out, and your stock is a high flier, the you could enter a PCCRC trade. Here are the steps:

1. Decide which strike price to use. The obvious is ATM (for AAPL it is currently $55).
2. Decide how much money to invest. About 30% of the trade will be recovered with the short portion, but you must enter the long-portion of the trade first, so you have to have sufficient cash in your account, which is NOT what the trade will cost in the end. This is a straddle, and you should enter it in the middle of the day. I usually enter the trade at 2:30 pm NY time. I believe that volatility is lowest at this time, and I tend to shave a few cents off the asking price. If it doesn't fill, I'd try again the next day. If I chose well, volatility should be in the decline.



3. IF the long portion fills, it should have been done before 3:00 pm NY time, because right after 3 pm, volatility begins to increase. I place the order for the short portion of my trade as a short straddle, about 1/2 the number of contracts of the long portion. In this case, I use 13/26 proportion for puts and calls as well. As volatility increases toward the end of the day, the order should fill.



4. IF it doesn't fill, don't worry, any unexpected strong movement in either direction overnight, will actually favor your long straddle. What you want to do with the short portion is to reduce cost, and risk of sideways movement in the stock. This trade on AAPL actually was only partially filled on Friday. I ended up with a 7/26 proportion on Friday. The remaining 6 filled early this morning at the same credit price.

IMPORTANT NOTE: as long as this trade is on, pay close attention to the volatility charts.





If you want to follow along, and have platinum, here is the URL for this trade:



http://platinum.optionetics.com/cgi-bin/platinumv30/op4email.php?trade_name=I|AAPL™_date=2005-10-21&sym=AAQ&num_legs=4&tra0=-13:K05:55.000:2.700:AAPL:2005-10-21:37.15499878:FFFFFF:0:0&tra1=-13:W05:55.000:1.900:AAPL:2005-10-21:37.44900131:FFFFFF:0:0&tra2=26:A06:55.000:5.100:AAPL:2005-10-21:40.97800064:FFFFFF:0:0&tra3=26:M06:55.000:3.900:AAPL:2005-10-21:40.61800003:FFFFFF:0:0