This article originally appeared Jan. 27, 2014, on Real Money. To read more content like this, + see inside Jim Cramer's multi-million dollar portfolio for FREE -- Click Here NOW.
I've searched and found a small trade in Apple (AAPL), but I'm actually more intrigued by how Google (GOOG) sets up and what it offers. Just last Wednesday we saw Google near $1,175 per share and this morning it was well below $1,100. We could see a push right back to those levels or even to $1,200 this week on solid earnings. I went long the Jan. 31 $1140-$1200-$1250 skip-strike butterfly this morning at $7.60.
My breakeven on this is about 3.5% higher than the current price while a maximum profit would require an 8.5% move. Options are pricing in a move around 6.25%, so I feel good about the placement of strikes here. GOOG blew away the estimated move recently, but this position does require a push higher. Should GOOG push lower, I am going to get wiped out here, so the risk capital is also the stop. In other words, the stop is zero on a downside move. If GOOG were to skyrocket over $1,250, I would only be looking at a value of $10. While still a good return, it's a bit disappointing if you are bullish on the stock. I'm moderately bullish, so I prefer this approach.
And before everyone gets all too excited about a stock they bought this morning that is coming back to life, note how the intraday charts almost all look the same. This concerns me. It says to me that this market is moving away from a stock picker's market to one of high correlation. Unfortunately, in bear markets or severe corrections, all correlations go towards 1. This is a pattern I want to see change almost immediately. It is not something that makes me feel good about establishing any long positions outside of an intraday scalp.
Back to Apple quickly since I did mention it, I went with long 2 by short 3 by long 1 weekly combinations on both the call and the put side. I used the $550-$562.50-$570 strikes on the call side and $550-$537.50-$530 strikes on the put side. My total cost was $17.60. These don't expire until Friday, so I know it will be a bit tough to get the max profit even if I am right. However, if AAPL gets beyond $570 or below $530, I still have a good chance at getting more than $17.50, which is the intrinsic value outside of the strikes. The biggest risk is no move at all -- for the rest of the week. The second biggest risk is a big move, then a quick fade back to $550. I don't view it as a high probability the stock doesn't move for the entire rest of the week.
At the time of publication, Collins was long GOOG call butterflies, AAPL call and put combos, AAPL LEAPs call spreads, and short AAPL LEAPS put spreads, although positions may change at any time.