Here's How Our Apple Trade Made Over 1,100%!

A trade I profiled in this blog post from June 19, 2019, has just returned over eleven times our money in just five months. That equals an 1,100% return, or 2,640% annualized.

How did we do it?

Well, in that post, I examined a bullish option trading strategy called a "fence".

Please re-read the article so you have a more detailed reference of what we did.

In a nutshell, since we wanted to get a foothold into Apple (AAPL), we sold a put option and bought a call option using the same expiration date when the stock was trading for $179 per share. This was a very bullish trade with downside cushion.

The fence trade was put on for a credit of $19. Meaning, we actually received money to make this trade. This trade cost us negative dollars to make.

How so?

Well, the put option that we sold brought in more money than what it cost to buy the call option, so the whole trade was put on for a net credit of $19 into our trading account.

At the close of trading today (11/15/19), the trade was worth $5,154, meaning if we closed it out, we'd make a gain of $5,173 ($5,154 + $19).

With Apple now trading at all-time highs of $265 per share, let's examine how this trade made the amazing gains we're claiming.

Trade Details

Here is the option chain posted from June 19, 2019:

The $145 strike put option was sold for $4.47 per contract (splitting the bid/ask) and the $215 strike call option was purchased for $4.28 per contract, netting a credit of $.19 per contract.

Since option contracts consist of 100 shares of stock, the option prices are multiplied by 100 to get the actual dollar cost. Hence, the credit received was $19 ($.19 x 100).

Here is the same option chain at close-of-business on November 15, 2019 with AAPL trading almost $87 per share higher:

The $145 put option is now worth $.06 per contract and the $215 call option is now worth $51.40 per contract (splitting the bid/ask).

Since the put option was sold for $4.47 per contract, it could now be bought back for $.06, netting a gain of $4.42 per contract ($442). This represents a "return on margin" (ROM) of 15.24% on this end of the fence.

When selling option contracts, a "margin requirement" is assessed by the broker, which yields the ROM.

On the other end, the call option was purchased for $4.28 per contract and can now be sold for $51.40, netting a gain of $47.12 per contract ($4,712) and a return on investment (ROI) of a massive 1,100%.

Add the two trades together, and you've got yourself a tidy gain of $51.54 per contract ($5,154). And gains of 1,100% + 15.24%.

But let's think about this: if we didn't have to break the trade down into two separate trades, and since it cost us nothing to get in (actually, -$19), we made a gain of $5,154. Does that mean we made 5,154 times our money (515,400%)?

You make the call.

In the end, if you're bullish on a stock and want to use an option strategy for no cost, consider the "fence". You may end up pulling down big returns like we did.

Until next time...

- Lee