We get all sorts of emails on "Options Action," but a recent one gave me pause. It comes from one of our many brave men and women serving our country in Iraq.
Van, who can only follow our show on podcasts, writes to Dan:
I'd like to know how Dan is handling his trade on AAPL from a few weeks ago. I piggybacked on this one, and it's working really well so far, even though the margin requirement is massive. This was my first back ratio and I'd like to know what his exit strategy is for a trade like this.
Thanks for all you guys do.
Van, let me be the first to thank YOU for all that you and your fellow servicemen and women do for us every day.
Now on to the trade, which Dan Nathan wanted to address himself.
First things first, we (the OA crew and me) greatly appreciate your service and hope that the most dangerous activities you engage in while over there is ratio spreads in Apple!
As for the Apple spread itself, if you got it on for a credit, you could at least book a $1.50 profit, which isn't bad considering you didn't pay anything for it (other than the margin exposure and the stated risks). If you are the sort who likes to take a bird in hand, then maybe take some off with a little more than two weeks to expiration. I feel that the risk reward of keeping it on and having the stock close between $190 and $200 on February expiration is pretty decent; the stock seems stuck in the mud at this point. If Apple stays between $190 and $200, those two, 190-strike puts you are short should continue to decay, and you will start to realize the full potential of the ratio spread.
The main risk you have is market risk at this point. If the market turned down hard, AAPL could easily head back to $180, and that is the level where you get long and no longer profit. If that risk worries you, then maybe take half of the position off and let the other half ride.
All the best, and get home safely!
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