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TheStreet Open House

Options Trade Alert: May Iron Condor on Apple

Stock quotes in this article: AAPL

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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