As Simple as Possible Is Not Always Simple

If you’ve been part of the Market Taker Family for a while, you’ve heard me say, “Keep your trades as simple as possible.” It’s sound advice. I stand by it. But…

The simplest possible trade isn’t always a simple trade.

I thought it would be fun to dissect a trade I made recently that was a little non-standard and, well, kind of interesting. Let’s dig in…

Earnings Trade in AAPL

In our Total Earnings Domination (TED) class on Thursday, our system triggered a trade in Apple Inc (AAPL). TED trades are typically time spreads. Our rules are to keep the time spreads as “balanced” as possible. By this I mean the spread break-evens are about equidistant from the current stock price. Another way to look at this is that the spread is delta neutral.  

That tends to occur when the stock price is at or very close to a strike price. When the stock is not close to a strike price, like when it’s pretty much right between two strikes, the way to balance the trade is to do a double calendar. That’s buying the out-of-the-money call calendar (higher strike) and the out-of-the-money put calendar (lower strike).

That’s easy enough, and I’ve done scores of these on TED trades. But what made this trade interesting was the strike distribution in AAPL options.

Option Strikes in AAPL Options

With our earnings trading system, we are always selling the front expiration—the one with the least amount of time till expiration. The other part of the time spread is buying a farther out expiration with the same strike. I like to buy the lowest volatility I can because that’s how we create value, or edge, on the trade.

With AAPL around $158.75 at the time, I wanted to buy the 157.5-160 double calendar. The lowest volatility expiration to buy was the Feb25 expiration. Sounds simple, right? Well…

There was no 157.5 strike in the Feb25 expiration. Ugh. They were in $5 increments in that expiration. So, they only had the 155 and 160 strikes.

The Feb18 expiration was the next best thing. It DID have the 157.5 strike. The strikes were $2.50 apart. But the volatility in the Feb18 expiration was a few points higher—less ideal—than the Feb25 option expiration.  

What I needed was the best of both worlds—a way to buy the lower vol and construct the spread using the 157.5 strike. So…

On the call side of the double calendar, I bought the Feb25-Jan28 160 call calendar. But on the put side, I bought the Feb18-Jan28 157.5 put calendar. So, I basically bought 2 different expirations as part of each spread but sold the Jan28 expiration on both spreads.

Is this a double calendar? I don’t know. Not technically, I guess. What’s it called? Doesn’t matter. It was the simplest solution to meet my objective.

The Best Options Strategy

A lot of times people ask me, “what is the best options strategy?” The answer is it is the one that meets your objectives. What the market calls for. It’s situational. Always. Even in a ridged system like Total Earnings Domination, in which the options strategy is laid out by default, there will end up being times when a trader needs to pivot and address the unique situation—like with this AAPL trade.

And that’s a great lesson. Don’t be afraid to get creative when you have to—just don’t get fancy for the sake of getting fancy. Keep it simple. …As simple as possible.

Dan Passarelli
Founder and President
Market Taker Mentoring, Inc.