Trading Apple Using Defined Risk Strategy

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  • How to hedge Apple (NASDAQ:AAPL) positions without wasting capital on buying option time premium.
  • How to define your risk on every trade and for the duration of every trading period.
  • How to make your positions immune to being stopped out regardless of market volatility.
  • How to structure your trades where the only way your AAPL positions can be called away is at a profit.

Apple AAPL 1980-2017 chart

40574325-14900354311386037Procedure to establish and maintain positions

  • Qualify the short, medium and long term trends.
  • Determine your profit objective
  • Objectively define your maximum risk.
  • “Collar” the trade by writing a call against your long position at your profit objective, using the collected call premium purchase a put to objectively define risk.

Determining trend

Using the daily data over the past 12 months what would have been easier to implement and generated superior gains, trading with the long term daily trend long or short, or against the trend (trend = red line)?

Current daily trend, up or down?40574325-14900465416629183

Using the weekly data over the past 5 years what would have been easier to implement and generated superior gains, trading with the long term weekly trend long or short, or against the trend?

Current weekly trend, up or down?40574325-1490046413213525_originUsing the monthly data over the past 20 years what would have been easier to implement and generated superior gains, trading with the long term monthly trend long or short, or against the trend?

Current monthly trend, up or down?40574325-1490046228767817

If the current short, medium and long term charts are all telling you the same thing what should your current AAPL position be?

  • Long
  • Flat
  • Short

Let’s look deeper into the technical indicators for confirmation.

Current technical indicators

If the overall indicators are an 80% buy what should your position be?

  • Long
  • Flat
  • Short

What would be the most responsible and least stressful way to maintain your long position in AAPL at $140.00+?

  • Stay long with no risk control using a hold and hope strategy.
  • Stay long using a protective stop which will not objectively define maximum risk due to potential fast market action and/or price gaps.
  • Stay long buying put option time premium to hedge the $140.00+ long.
  • Stay long using a strategy that objectively defines risk on every trade and for the duration of every trading period without wasting investment capital on purchasing net option time premium to hedge.

How to define risk on every trade and for the duration of every trading period.

Example market Apple (NASDAQ:AAPL)

  • Current position; long AAPL shares at $140.00.
  • Write the $150.00 call collecting 0.24 (expiration 21 April 2017)
  • Using the 0.24 collected from the $150.00 call write purchase the $130.00 put to hedge your $140.00 long share position.

Current options quotes.

Potential outcomes for this trade at expiration, 21 April 2017.

A) Share price at expiration is between $130.00 and $150.00, both the call and put expire worthless, (we’ve collected 0.24 in premium on the written $150.00 call and lost 0.24 on the $130.00 purchased put) plus or minus whatever the $140.00 long share position generates. At expiration if the market is still in an uptrend as qualified by the indicators above we’ll lay down another collar for example, if the market is at $145.00 we’ll write the $155.00 call, using the collected premium buy the $135.00 put.

B) AAPL goes from $140.00 down to $0.00, the $150.00 written call expires worthless, we lose $140.00 per share on the stock but make $130.00 per share on our $130.00 purchased put. Net we’re out $10.00 per share or -7.14% on a move in the share price from $140.00 to $0.00.

C) Apple’s uptrend continues from $140.00 to a price of $152.00 at expiration. We’ll deliver our $140.00 long to offset the $150.00 written call. Net we’re up $10.00 per share for a 7.14% gain during the 4 week period. With the trend still higher we’ll reestablish a new long share position and new collar.

Depending on volatility the collar could range from + – $5.00 to + – $15.00,

Example using +- $5.00 collar, long AAPL at $152.00 write the $157.00 call, buy the $147.00 put.

Example using +- $15.00 collar, long at $152.00 write the $167.00 call buy the $137.00 put.

Determining the profit objective

The written call acts as your profit objective, adjust the call strike price you’re writing to be consistent with your profit objective over the time period you expect your profit objective to be achieved.


If your one month objective for AAPL is a move from $140.00 to $150.00, write the one month $150.00 call. Using the collected premium from the $150.00 call buy the $130.00 one month put to hedge the $140.00 long share position.

If you’re trading shorter term with a 2 week objective from $140.00 to $145, write the 2 week $145.00 call, using the collected premium from the $145.00 call buy the 2 week $135.00 put to hedge your $140.00 long share position.

Reviewing current ranges should assist you with determining your profit objective and the timeframe for the objective.

Current ranges


One example of an AAPL “collar” at work

21 July 2015

My position 21 July 2015, long AAPL at $130.00, I wrote the $135.00 call against my $130.00 long, I used the collected option premium to purchase the $125.00 put with less than 6 weeks to expiration.

40574325-1489719497929233Earnings expectations priced into the market were beyond Apple’s reach for the quarter sending AAPL shares tumbling more than 7%. AAPL eventually sold off $38.00 a share from $130.00 down to $92.00 for a 29.23% loss by 24 August 2015.

Trading with a collar; At $125.00 my put engaged hedging the $130.00 long against all losses below $125.00, my total loss was $5.00 per share for a 3.85% loss versus a 29.23% loss on a “naked long”.


After the hemorrhage was cauterized and market action using the indicators above showed AAPL was again trending higher I reestablished my AAPL longs defining my maximum risk

My outlook

Personally I don’t know how long this bull market is going to last, how high we’ll go, or how hard the correction will eventually be or when. Two things I do know, not hedging to define risk at current levels is just irresponsible and not being prepared to short the market and catch the move lower once the correction engages is just wasteful.

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40574325-14900670722250545_originI’m looking forward to the major changes in U.S. policies over the next 4 years. These U.S. policy changes will fuel the major market moves (up and down) that professional traders like myself live for.

Reports on deck

  • Trading gold using defined risk trading strategies
  • Extreme fundamentals that will impact all of our portfolios
  • Trading the coming trade wars
  • Capturing the major market moves in the U.S. dollar
  • Hedging a hemorrhage and capturing the move lower in stocks using defined risk strategy.
  • U.S. economic reports fact or fiction
  • Generating income writing credit spreads in energy markets
  • Understanding changes in implied volatility
  • The risks and rewards of trading vertical credit spreads, short butterflies, short condors, ratio call back spreads and ratio put back spreads as implied volatility spikes before earnings announcements.

Disclosure: I’ve been a professional trader and run a family office from the British Virgin Islands for the past 20+ years, zero income, corporate, sales and inheritance tax and would like to keep it that way. Because of the potential U.S. tax implications I do not manage U.S. accounts or sell advisory services to U.S. clients. I do however manage funds for qualified non-U.S. investors and entities. I may at times for my own accounts, our family office and/or for the accounts I manage for non-U.S. investors have positions on that could be contrary to the ones mentioned in my Seeking Alpha reports.


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