$10,000 Income Portfolio

[Dmoney]

To boil it all down: Apple makes money on things people love; Google makes money on things people hate (ads). That's a powerful statement and it makes me stay far away from one and flock to the other both as a consumer and an investor.

Love this quote.

Unfortunately, I've never bought into Apple, kicking myself now thanks to my flawless hindsight.
I always underestimated people's desire to spend on wants, and continue to do so. I know that I'd never spend a penny of my $$$ on any Apple product (I would probably buy an iPod, but was saved by receiving one as a gift) and I project that on others. Fortunately for Apple shareholders, there are countless people who will buy 5 iterations of each of Apple's products. In the past couple years, I've realized that more than a tech company, Apple is a marketing machine.

They have somehow convinced legions of their fans to do their marketing for them, which is incredibly powerful. The number of times I've heard ... "my Mac can do this" makes me want to blow up Apple's headquarters. But people are listening, people are buying, and every time I pass an Apple store, it's swamped. I might not bet on Apple, but I sure as hell won't bet against it.

[GOB]

DMoney, there are a couple of misconceptions you are making.

1. Not that many people buy every single iteration of an iPhone/iPad/etc. Of course there are some, but the majority of users either upgrade every two to three years (like myself), are switching from other brands or are entirely new to the smartphone space. That segment of the consumer base is far, far higher and contribute much more to earnings than the ones who line up for every iteration. Replacement of technology is not a concept unique to the Apple consumer - most people will tend to upgrade their devices after a few years. In fact, since Apple supports older models much better than any other brand, I'd wager there is a greater percentage of people who use their iPhones for several years than any other competing model. I don't have the data to back that up, but it makes sense to me, and I see tons of 3G/3GS phones still being used.

2. Apple certainly is a marketing machine, but in order for that to work continuously there has to be a rock solid product line behind all that marketing. You may not purchase Apple for whatever reasons you have, but the fact is Apple products are the best products available for the needs of a huge segment of the population. The marketing takes an already impressive device and turns it into a "must-have" (which is the whole point of marketing). Apple's popularity is also becoming a bit of a double-edged sword these days (antenna gate, Maps, scratching, etc.) where every little thing becomes overblown and scrutinized.

[GOB]

What an unbelievable day. I was happily thinking my spreads would expire worthless without a worry. Looks like it'll just make it but I went the safer route earlier this morning and closed out my 600/610s. Also went on a little shopping spree for next week and Apr 2013. Looks like there may be some even better bargains next week.

Oct 19

Sold: 10 AAPL 21OCT12 $600/610 BuPS @ $0.39: -$400.24 (Total Profit +$415.53)
Expired: 10 AAPL 21OCT12 $585/590 BuPS (Total Profit +$226.69)
Bought: 16 AAPL 28OCT12 $560/565 BuPS @ $0.55: +$860.01
Bought: 3 AAPL 13APR109 $690/695 BuCS @ $1.50: -$452.53

I like BuPS. On a week where AAPL dropped over 3% (and over 6% from high to low) I still managed over $600 profit. Meanwhile my $685 put is waiting to recover tying up capital in the process. Perhaps I was too quick to hop on the put selling train. Although I still see the appeal for that, I'm starting to think spreads can provide equivalent returns while also allowing for more downside protection. I'm always learning.

[Lephturn]

AAPL slaughterfest today. Ouch.

This was on Wednesday:

AAPL Nov12 605/625 Put Spread 4 / -4 644.61 $324.00
Delta 43.87 Gamma -0.38 Theta 17.77 Vega -38.38

Same position right now:

AAPL Nov12 605/625 Put Spread 4 / -4 Cost= -$2,904.00 Value= -$4,300.00 Gain/Loss= -$1,396.00
Delta 45.42 Gamma -0.02 Theta -8.18 Vega 3.57

And that folks, is what happens when your spread goes in the money on the short side - your Theta and Vega invert. We'll see how next week progresses - but this will really test the waters. I don't want to see what happens when this thing crashes through 600. Ow. The next strong looking demand level I see is $ 590 or so.

[GOB]

Stay strong. This is a broad market sell-off and AAPL is paying for the poor earnings of GOOG, IBM, MSFT etc. Nothing has changed fundamentally for the company. If we are still low after earnings and IV drops - time to load up on some OTM 2013/2014/2015 BuCS. Just my opinion as always.

[humble_pie]

bt another diagonal pair in aapl this am. Stk was around 620.00

bt 1 aapl 2015 jan 400 @ 252.00 cost 25,211.24
sld 1 aapl jul 700 @ 42.50 proceeds 4,238.66
net cost 20,972.58.

profit is limited to (30,000.00-20,972.58) although as time passes, cost will be worked down via additional short-term call sales.

a possible return of 42.95% over 27 months is not to be sneezed at.

[GOB]

^ definitely not!

Could this finally be the bottom? To early to tell as we have two mega-volatile events coming up, but this looks very promising.

Just for the heck of it, I took a flyer on poor AMZN earnings with a cheap bear put spread.

Oct 22

Bought: 1 AMZN 16NOV12 $185/190 BePS @ $0.29: -$31.12

[humble_pie]

lepht is after me for quantitative vol analysis so i am responding by retreating even more into the custard & saying it doesn't quite look as if iMini is going to wow america ...

gob with respect to your high-priced put - it was a nov 685, was it not - i've often been in situations like this. Occasionally with ITM puts, more often the opposite with DITM calls after stock has soared. What i do in these situations is gingerly mince my way forward, rolling rolling rolling like a croquet ball through wickets.

alas mincing delivers only morsel-sized profits or less. The capital unfortunately remains tied up, but the high-flying days of double-digit returns every month can be gone for a while. Especially when a particular stock has careened up or down into another different price stratum where, by gosh & by golly, it intends to stay.

it takes a while to coax all the option croquet balls through the wickets into the new lower (or higher) playing field but eventually they all do get there ...
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[GOB]

Sorry I've been out of action for a while. I didn't post it but I sold 4 AAPL $645/650 BuPS on Wednesday for some grocery money. All spreads once again expired safely. Poor week for AAPL yet I banked some good money - close to $1,000. My $685 put continues to go deeper in the red along with the stock, but I remain confident that I can get rid of it in due time. The only problem is that it's tying up half my capital. Good lesson learned.

Couldn't resist getting into some cheap bill spreads that I think have a great chance of paying out. Part of the plan or this portfolio was to accumulate cheap spreads as the opportunities become available, and think I've done a good job of it so far. Much like AAPL stock, I think 2013 will be a great year for this account. We will get out of this mess.

Oct 26
Expired: 4 AAPL 26OCT12 $545/550 BuPS (Total Profit +$73.00)
Expired: 16 AAPL 26OCT12 $560/565 BuPS (Total Profit +$860.01)
Bought: 5 AAPL 21JUN13 $685/690 BuCS @ $1.50: -$754.99
Bought: 10 AAPL 02NOV12 $570/$575 BuPS @ $0.30: +$284.82
Bought: 1 AAPL 17JAN14 $650/$690 BuCS @ 14.00: -$1,401.50

[humble_pie]

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salut lephturn you can see how most option traders here are buzzing the strike price fringes of hi-volatilitiy stocks; ie they are doing put & call spreads at strike prices a considerable distance from market.

what's going on here is a probability calculation i think. Heaven knows i do enough of these myself. The idea is to work at extremities which probability suggests will never be exercised while staying in a super-liquid hi-volatility stock so that the premiums to be captured will be worthwhile.

probability of exercise increases, of course, as one moves the strikes closer to market price of the underlying. The rate of increase is a curved line, not a straight. My question is, do any of the greeks describe this progression ?

perhaps it's a function of gamma theta. I can see how the delta can be used as a measure, too. A low delta option will be further away from market; a hi-delta (i belong to the school that counts em as 100) will be ITM.

for want of a better term i've been calling probability-of-exercise the jam factor. However there has to be a better name.

below is a table showing aapl december 22 calls as of the close friday 26 october. Two pairs are underlined as an illustration, the 640/650s & the 690/700s. One can see that the 640/650s will bring in 2.50, with a clear possibility of exercise, while the 690/700 will bring in only .67 but the probabillity of exercise is greatly reduced.

all the pairs down to 600/610, which brackets friday's close at roughly 605, will form that perfectly curving line.

lepht you are the northern magus of option greeks. Any comment you might have to share would be so welcome.
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