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An Apple Collar, and a long Call HD
The mathematical models proved valuable once again this week as the bull put spread trade on PCLN was confirmed by the model, and confirmed by reality as the trade could now be unwound for a profit of $1400 on the initial risk of $2400. If you are sitting on this trade unwind it on Monday morning. There is only $200 in potential profit left in the trade and the risk is now $3800 on the downside.
There is plenty to fear after this choppy week of action even after the solid rally the past two days (or maybe because of it). The potential Italian sovereign debt crisis casts a dark shadow over these markets and for good reason. There is no mechanism in the world that can bail out Italy.
It is with this backdrop that both Dan and Mike are advising cautionary trade advice on Home Depot and Apple. Dan is recommending a collar against any long holdings in AAPL, and Mike is suggesting a stock replacement strategy on HD ahead of earnings.
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Dan recommended putting a collar around long holdings of Apple. Specifically, he recommends selling the 400 call for December and buying the Put protection at 370 for the same expiration. The 400 call can be sold for $810 per contract and the insurance protection at 370 can be purchased for $1010. The net cost for this trade is $200 per contract.
This trade is only recommended for investors that currently have a long position in the tech giant. The sale of the 400 call contract for December would therefore be covered. The 370 put purchase acts as insurance. Since the expiration of both contracts are the same, this is a collar trade and there is a debit since the insurance portion is more expensive than the premium collected from the sale of the $400 strike call.
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You could place this trade if you are a long investor in AAPL and are concerned about short term volatility in the underlying equity. By placing this trade, you are capping your gains at the $400 level and you are protecting against total calamity by buying protection at the $370 level. This makes sense if you are having trouble sleeping at night in this wild stock market, or if you just think the underlying equity is due for a correction. Of course, if you felt that way for certain, you could just sell the stock and sleep even easier.
You could modify the trade buy replacing the $370 Put for the $365 Strike. The $365 Put is less than the $400 call. This modification would turn the trade into a net credit. At this level, you could actually generate income from this trade.
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