Friday, May 31, 2013

an investing business model using aapl mini-puts

last week i shorted a mini put on aapl. this trade was successful and the option lost value enabling me to keep the premium.

i could have let the option expire worthless and just keep the premium but a one-off trade like this is not terribly interesting. the interesting thing about short puts is that they are the gateway to the calendar manufacturing business. on thursday i inaugerated my aapl mini-calendar manufacturing business by buying back my may5 435 mini-put and selling the jun1 435 mini-put as a single transaction. here's my trade history for the week:

the first transaction in this list is the calendar that i sold for a profit of $2.33. my manufacturing cost for this financial product amounts to .30 - my brokers commissions for buying and selling the two option contracts. in the calculus of mini options this realized $20.30 (paid to my account at clob, not 3 days later.) i am totally serious when i say that i made 766% (=2.33/.30) profit on this transaction. i fully expect to repeat this transaction next thursday and weekly ad infinitem.

a business this good should be grown and that is the idea of the last three transactions. on 5/31 aapl moved up into the high $450 handle. when aapl happened to be at its high point for the day i purchased three aug 290 strike mini-puts for .20 and sold two additional jun1 435 mini-puts. this created what is known as a diagonal - an option trade where one owns far-dated options and shorts near-dated options at a different strike. the 290 strike was chosen because it is equal to about 2/3 of the 435 strike. this keeps the buying power allocated to these three mini-options level with the previously cash-covered, short mini-put and adds just .035 (=(.20 + .15)/10,  there are 10 weekly roll opportunities between june and august and $1.5 commission on purchase) to the manufacturing cost of producing weekly mini calendars. thus, i have tripled the size of this admittedly small business with no additional risk.

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