Apple Inc. ( AAPL ) was hit with a pair of mixed reports yesterday. Bright and early on Monday morning, Berenberg lifted its price target to $445 from $349, while reiterating its "buy" rating on the digital gadget guru. However, a Reuters report released just ahead of the open indicated that top hedge fund managers may be selling their holdings in the company. Ultimately, AAPL followed the rest of the market lower, retreating once again from short-term resistance in the $360-$365 region.
The stock's retreat didn't slow bullish options traders, however, as their focus remained solidly on AAPL calls. In fact, 234,190 of these typically bullish bets traded on Monday, compared to just 166,885 puts. While the most active contract on the session was the March 360 call, with more than 22,000 contracts crossing the tape, I found the activity on the June 400 and 315 calls to be much more interesting. In fact, it would appear that one options trader opened a rather bullish spread position utilizing these strikes.
Specifically, 400 June 400 calls traded on the International Securities Exchange (ISE) yesterday for the ask price of $6.58, or $658 per contract. This block was marked "spread." At the same time, 400 June 315 puts traded for the bid price of $9.40, or $940 per contract. Given this data, it would appear that we are looking at a split-strike synthetic long position on Apple.
The Anatomy of an Apple Synthetic Long Position
Before we get into the particulars, a synthetic long options trade attempts to replicate, as closely as possible, a long stock position. The trader typically buys at-the-money calls and sells at-the-money puts in equal numbers at the same strike with the same expiration date. In this example, however, the trader opted for cheaper out-of-the-money options, creating a "split strike" synthetic long. By using options, the trader gains considerable leverage, allowing for greater returns on the position than those achieved by investing the same amount of money in a stock position.
Overall, the trader paid $6.58, or $658 per contract, for the 400 June 400 calls, and received a credit of $9.40, or $940 per contract, for selling 400 June 315 puts. As such, the trader will collect a premium of $2.82, or $282 per contract. For those curious readers out there, the total net credit would have been $112,800.
The maximum profit on this trade is theoretically unlimited, since there is no cap to how high AAPL shares can rally. The maximum loss, while considerable, is limited to the strike price of the sold June 315 put minus the net credit, or $312.18, or $31,218. Coincidentally, breakeven is also equal to the strike price of the sold June 315 put minus the net credit. Below is a chart for a rough visual representation of the trade's profit/loss scenario:
Rising implied volatility is pretty neutral for a synthetic long trade. Specifically, it lifts the value of both the purchased and the sold options, thus increasing the cost to buy back the sold put and boosting the premium received when selling the purchased call. At the time the position was entered, implied volatility for the AAPL June 400 call was 28.20%, while implieds for the June 315 put were 33.89%.
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