Update – Hedge Hogs (QQQ, AAPL)

by CC February 7, 2018 3:08 pm • Trade Updates

It’s a fairly uneventful day in the broader markets compared to the last three. That type of breather is a good time to check in on some trades that may be benefitting (or protecting against) the volatility we are seeing. I wanted to specifically look at an Apple (AAPL) hedge, as well as a portfolio hedge using the QQQ we’ve featured on the site in the past few weeks. The first was a hedge for those long AAPL stock into Q1 earnings, reported Feb 1st. Here was the original hedge:

VS 100 SHARES OF AAPL ($167.25) BUY THE FEB16TH 180 CALL 165/155 PUT SPREAD COLLAR FOR $2
  • Sell 1 Feb16th 180 call at 1.10
    Buy 1 Feb16th 165 put for 4.20
    Sell 1 Feb16th 155 put at 1.10

The stock fell following earnings and when it was 163 and the hedge was worth 3.20 we had this to say:

Because this is a hedge with an opportunity to save up to $8 on a continued decline I think the best course of action is to stay with it. The short 180 calls are now worth just .20 and can be closed. Below here in the stock, $160 looks like the next support level and the hedge can be re-assessed there. If the stock were unable to hold there $155 very much looks in play.

After that update the market tanked and AAPL got as low as 155 on Monday, but only for a second into the close and on the open the next day. When stocks rebounded on Tuesday this was back towards 160. And it got as high as 163 into yesterday’s close. Today it’s back to about 160 so let’s try to get our bearings.

With the stock 160 this hedge is worth about 4.50. That means it’s counteracted about 2.50 of the decline for long stockholders. With the markets still a bit shaky I think it makes sense to keep this on with next Friday as expiration. The reason is that it can protect for the next $5 lower on a one to one basis. And since we saw that $155 trade during the other day’s selloff, it could happen again in the next week and a half if the market wants to retest those lows. At some point if the stock hangs on and is above 160 it may make sense to roll, but not yet.

Next, let’s check in on the QQQ. I actually provided an update on this trade right before the market tanked on Monday. Here was the original trade idea, from Jan 24th:

Portfolio hedge or outright bearish:

Buy the QQQ (168.70) Feb16th 167/157 put spread for 1.90

  • Buy 1 Feb 167 put for 2.30
  • Sell 1 Feb 157 put at .40

With the QQQ lower on Monday at 163.20 (but right before things got wild) and this QQQ put spread worth 3.25 I posted an update basically saying the near-term nature of this trade was best suited for the uptick in vol:

But should the market continue lower this week, this put spread as is will give you the most bang for your buck as a hedge or outright bearish position. The put spread is short more than 50 deltas here and that will continue to pick up (become even more bearish) as long as the QQQ is around this level or lower.

We’re seeing the potential volatility that this trade idea was looking for right now. Therefore it has an ideal expiration (next Friday) to take advantage of that

The market then tanked after the post and the QQQ got as low as $156 (but like AAPL, only briefly). Now with the QQQ at 161 this trade is worth about 4.50. Like AAPL I think it makes sense to be patient here before taking this trade-off or rolling. If the market retests its Monday lows it’s likely to do that in the next week and a half. This trade is perfectly positioned for that. If the worst truly is behind us then that will become pretty obvious and this can be closed or rolled with the QQQ here or slightly higher before it expires. The breakeven on this trade is up near 165 so there is some room to get out higher and still make money on the trade, but the risk down in the market is the important thing right now, and this trade is well positioned for that until next Friday.

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