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Options Trade Alert: May Iron Condor on Apple

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Top Gun Options ) -- Strategic Mindset: Our overall strategic mindset at Top Gun Options is Market Neutral with a Bearish Bias.

Target: Apple (AAPL) trading at 607.35

Commit Criteria: Apple had an outstanding first quarter as seen in the three-month chart below.

After five straight losing sessions and a formal 10% correction, Apple has regained its footing and we believe found support. Two standard Wall Street forces are also effecting AAPL :

  • "Window Dressing"
  • "Sell in May and Go Away"
  • Apple

    Many large institutional holders of Apple (Large Hedge Funds, Mutual Funds) tend to sell their biggest winners and the end of a quarter to "dress up" their numbers in their quarterly report to clients and investors. When institutional holders with significant holdings sell they can leave a mark on the stock. With so many institutional holders of Apple wanting to report good Q1 numbers and after a nice healthy run up, it was inevitable that Apple would suffer some window dressing or sector rotation for a brief period.

    At Top Gun Options, we believe that pullback is over but Apple will not begin a broad rally with heavies at major trading desks heading to the Hamptons and wanting to keep their powder dry. We see Apple settling into a channel until May expiry.

    Add an upcoming battle with the new Ipad and Windows 8 Tablet , and we believe we can take advantage of the rising increase in IV (implied volatility, see below) relative to historical volatility with earnings next week and employ a potentially profitable tactic on Apple.

    Tactic: May Iron Condor with Neutral Bias.

    Iron Condor Tactical Employment (2 Spreads - a Bull Put Spread and a Bear Call Spread):

    Bull Put Spread

  • Buy 8 May 530 Puts for 6.10 as a hedge
  • Sell 8 May 540 Puts for 7.825
  • Bear Call Spread

  • Sell 8 May 680 Calls for 7.40
  • Buy 8 May 690 Calls for 5.925 as a hedge
  • For a net credit of $3.20, or $2,560 in the Primary Model Portfolio.

    Midcourse Guidance: We will monitor this trade and make adjustments in our Primary Model Portfolio (Up over 20% Q1) as necessary. If we see one of our short strikes (the strikes we sold -- 540/680) take a 50% loss, based on current market intelligence we will decide whether to close that spread, roll it 'up and out' to June, or take other measures as needed.

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