Exploiting Events using Options

1. Exploiting Events using Options

2. AAPL • AAPL announces on 1/17 (MLK market holiday) that its iconic leader Steve Jobs is taking another medical leave of absence (indefinite this time). AAPL shares in Frankfurt drop as much as 8% before recovering to a 6% drop (~$348 to $327) • AAPL is slated to announce its Q1 /11 results after market on the following day (1/18). You know the following: • Their previous quarter was lighter then expected in iPad’s because of supply constraints • Amazon reported that iPhone and iPad were 2 of their 3 top selling products during the holidays • Overwhelmingly – analysts expect AAPL to overachieve in this, their strongest quarter

3. How do you play this • Buy stock at open • Sell stock short at open • Buy – write (buy stock, sell higher call) • Buy bullish call spread at the open • Sell put at the open • Buy stock before close • Buy vertical bull spread before close • Buy put before close

4. Possible actions – Buy Stock • Buy stock at open – 100 shares @ $326-$334, stock climbs by end of day to $340, peaking at $345. After hours, when company blows past expectations stock hits $357 before falling back to $345; Following day is a negative market day stock wavers between $337 - $348, closing at $338+ • $~33,000 investment; profit of between $800 (2.5%) and $2,700 (~8%)

5. Possible actions – Short Stock • Lose $800 - $2,700

6. Possible actions – Buy write • Buy stock at open – 100 shares @ $326-$334,Sell 1contract of Jan $345 (@ $1.5-$2.0 per contract or $150-$200 in proceeds) stock climbs by end of day to $340, peaking at $345. After hours, when company blows past expectations stock hits $357 before falling back to $345; Following day is a negative market day stock wavers between $337 - $348, closing at $338+ • $~32,800 investment; profit of between $1,000 (3.1%) and $1,700 (~5.5%)

7. Possible actions – Bull spread @ open • Buy 70 contracts of Jan $330/$340 C spread @ ~$4.50 ($3.70-$5.00). stock climbs by end of day to $340, peaking at $345. After hours, when company blows past expectations stock hits $357 before falling back to $345; Following day is a negative market day stock wavers between $337 - $348, closing at $338+ • Contract peaks $7.00 on 1/18, no afterhours contarct trading , reached $8.50 on 1/19 • $~31,500 investment; profit of between $17,500 (~55%) and $28,000 (~89%)

8. Possible actions – Sell PUT at Open • Sell Jan $330P at open – 2 contracts @ ~$8/per, stock climbs by end of day to $340, peaking at $345. After hours, when company blows past expectations stock hits $357 before falling back to $345; Following day is a negative market day stock wavers between $337 - $348, closing at $338+ • $~13,200 collateral, no real investment; profit of $1,600 (>12%) if you let it expire

9. Possible actions – Action Before Close • Buy stock at close – advantage: you are more certain the stock is recovering from the Job news – 100 shares @ ~$340. After hours, when company blows past expectations stock hits $357 before falling back to $345; Following day is a negative market day stock wavers between $337 - $348, closing at $338+ • $~34,000 investment; profit of between $800 (~2.5%) and $1,700 (~5%)