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Option Tip
– Thursday, October 6th, 2011 –
AVSPY

AVSPY-aapl

Introduction

This option tip, basically, is using the NASDAQ OMX Alpha Index Options to Trade Apple.

Apple (AAPL) traded down 0.56% on Tuesday, a day when the market staged a sharp last-hour rally to close up 2%, but managed to climb back above this point on Wednesday. Seemingly, the downturn was due to the fact that investors were somehow disappointed that Apple did not announce the "iPhone 5," whatever that means. Is this a similar situation to the negative reaction suffered when iPad was first launched (look at it now!), and eventually the criticism and cynicism will fade.

Whatever the cause of the lag in Apple shares, NASDAQ OMX Alpha AAPL vs. SPY Index (AVSPY) was down 2.5% on the day as a result.

Alpha Indexes and Apple

AVSPY

If you have not traded these options on this index before or are otherwise unfamiliar with these newer Alpha Indexes, a brief review is in order. The idea behind the Alpha Indexes and the accompanying option contracts was to provide a trading vehicle that could be used to isolate the relative performance of a company. Rather than betting on a rise or fall in the marketplace, these index options offer the ability to bet on whether a company is going to outperform or underperform the market. In the case of outperformance the index will rise; in the case of underperformance the index will fall.

In this case AVSPY tracks the daily total return of AAPL versus SPDR S&P 500 ETF (SPY). Essentially, a long position in the index would be a bet that Apple will outperform the broad market.

Reasons for this Option Tip

An interesting trade was filled in this product on Tuesday. Typically, customers trade AVSPY options in lots of 5 or 10 contracts, but one trader sold the March 155 puts naked 3,000 times at a price of $7.90, about a half hour before the market close. That's a very bullish bet that Apple will continue to outperform over the next six months - if the trader is correct, the value of the premium collected is $2.37M.

This seems to be a general view that AAPL will continue to outperform. SPY is still 13% exposed to the financial sector, the anchor around the neck of the U.S. economy. For AAPL to underperform the broad market over time would require a serious misstep from Cupertino.

Since premiums, in the options, are about as high as they've ever been, a call purchase is not a great idea. Traders who share the thesis of the trade could establish a synthetic long position -- effectively "owning" AVSPY even though the underlying is not tradeable -- by buying an at-the-money call and selling an at-the-money put.

However, this option tip allows you to position yourself with less risk which is advisable, therefore, sell a vertical put spread on the view that AAPL will continue to be a relative market leader, even if the market as a whole doesn't go anywhere.

A favorable point about these relative value plays is that they don't require a directional opinion about stocks in general, i.e. this trade is still viable if you are generally bearish about the market.

Option Tip Trades:

Buy to open AVSPY November 150 puts for $1.95 and sell to open AVSPY November 155 puts at $2.75.

”Success is simple. Do what's right, the right way, at the right time.”



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