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Trade Update

Tuesday, 20 Oct 2009 | 1:53 PM ET

Now for the update on Dan Nathan's trade. Just to recap, he suggested buying the November 190/200 call spread, paying $7.80 for the Nov 190-strike call and collecting $4.20 for selling the Nov 200-strike call, net-net paying a total of $3.60 to win a possible $6.40. To further reduce the costs, he then sold the Nov 175-strike put and collected an additional $3.40. Now, if Apple stock falls below $175, he'd be forced to buy the stock on expiration. But with the money he's collected from selling that put, Dan's effectively bought that 190/200 call spread for a total of $0.20 cents, allowing him to make a potential $9.80 if Apple blows through that short-strike by expiration.

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The rest as they say is history. Apple stock shot above that 200-strike, realizing the full value of that spread.

So what's the move?

"Take the money and run," said Dan, from his perch a top Phoenix Partners Group. "You can sell the whole for roughly $5.50."

So let's do the math again. Dan risked $0.20 (excluding margin) to make $5.50, all on a trade that was no riskier than buying Apple stock for $175 dollars, or 12% less than where it is right now. So what happened to that $9.80? Well there's time value in those options, so to make the full value of the spread, you'd have to wait until expiration and hope the stock stays above that $200 dollar level.

Questions, comments send them to us at: optionsaction@cnbc.com

  Price   Change %Change
AAPL
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