I’m often asked why our options trading newsletter is called the “Market Taker Edge”. The premise for the trades in the newsletter is that they all have what veteran option traders call Edge, a statistical advantage that relates payout structure to chances of success.
Apple Inc. (AAPL): Bull Put Spread
There are many ways to look at edge. We’ll look at this week’s trade, the Apple (NASDAQ: AAPL) June 310/320 Bull Put Spread, from a very straightforward perspective.
Short the June 310/320 put spread by shorting the June 320 put and simultaneously buying the June 310 put. The trader should collect a net premium of at least $1.00. The premise to the trade is that if AAPL is continuing to trade above the short put strike (320) when the options expire, the maximum potential profit is locked in at 100% of the credit collected (less commissions).
The maximum loss, should Apple be trading below 310 at expiration, is $9.00, or the difference in strikes less the premium collected. Breakeven at expiration for this spread is Apple at $319; as long as Apple is trading north of this level when the options expire, the spread will be profitable.
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Edge is derived because of the relative expense of AAPL options. Specifically, AAPL options are ripe for selling at this volatility level. From a technical perspective, the 320 level offers huge support. This is a nice high-probability trade. The trader risks nine to win one if you look at this trade from a simple payout perspective. But I give the chances of success with Apple currently trading north of 345, the odds are much better than 9:1. That means the trade has statistical edge.
Dan Passarelli of MarketTaker.com writes the Market Taker Edge options newsletter. Dan has more than 17 years’ experience in the options industry as a market maker, Options Institute instructor and author of “Trading Option Greeks.”