You have heard us talk about risk reversals before. This is a case where one may work well. Our Apple (AAPL) trade is obviously moving against us. We had set the trade up to be neutral to downside, but the stock has moved higher steadily since we put the trade on. This is an opportunity to create a back ratio for no additional expense where we will reduce the cost of the trade because we’ll have a slight credit.
This is a two-part trade. We are first going to roll the short put to generate income. We are rolling the 13 Jan 127 put that expires Friday out a few weeks and up to 128 for the credit. We will then use the proceeds from that roll to buy additional calls giving as a risk reversal slash directional bias to the upside.
TRADE ADJUSTMENT: Roll Short Option and Add a Risk Reversal
Apple (AAPL): 132.75
TRADE ACTION 1: Roll the AAPL 13 Jan 127 put to the 3 Feb 129 put for a credit of around 2.65 to 3.10
BTC the AAPL 13 Jan 127 put
STO the AAPL 3 Feb 129 put for a credit
Once that roll is completed, we will purchase/buy some short-term additional calls to offset our call position.
TRADE ACTION 2: OPEN AAPL 20 Jan 133 calls for a debit of around 2.80
BTO AAPL 20 Jan 133 calls
This should result in a net credit of 0.25 to 0.30 for the trade but more importantly limits our risk to the upside and may actually result in profits if the market keeps moving up.
The Master Portfolio is trading 5 contracts.