Last week was rough: the S&P 500 briefly broke below 7,600, the Nasdaq broke down and semiconductor ETFs ended October lower. In episode 482 of Options Playbook, Brian Overby looks at where the market stands heading into the midterm elections and Friday’s jobs report, places an earnings trade in Apple, and shows how he’s managing his own Google position. He starts with the backdrop. The VIX is around 18–19, and institutions are buying about four puts for every call, mostly as hedges — “bullish but nervous.” Markets usually rise in October before midterms; this year they didn’t, which reminds him of 2018, when the Fed was also raising rates. FedWatch shows about a 70% chance of a December hike. Money is moving out of tech into healthcare, consumer staples and some industrials, and into homebuilders, where Berkshire Hathaway has bought billions of dollars of Lennar. The 10-year yield has slipped just below 5%. Apple reports after the close, near $341. Apple has been rewarded for not overspending on AI, but Brian leans neutral to bearish and repeats the trade that worked for him in Microsoft: a skip-strike call butterfly as an alternative to a short call spread. The expected move is about $14, and the 355 call is around a 20 delta. In the November 6 expiration he buys the 355 call, sells two 357.50 calls, skips the 360 and buys the 362.50, for a 25-cent credit. If Apple falls or stays put, he keeps the 25 cents; risk only starts above 360, more than a one-standard-deviation move; the maximum loss is $2.25. His rule for these trades: collect about 10% of the skipped width — 25 cents for 2.5 points, 50 cents for 5, a dollar for 10. Then he’s candid about Google. He’d been selling “covered calls on steroids” to trim an oversized position before year-end, but the stock fell before his shares were called away. He shows the same front spread now, in the November 20 expiration: against 100 shares, buy one call and sell two 295 calls for about $2.12. That’s less than the roughly $3.88 a plain 295 covered call would pay, but it adds five points of extra upside and gives more flexibility to close or roll. For holders who want protection instead, he buys a 280/265 put spread, 18 days out. Including the roughly three-point gap down to the 280 strike, the cost is about 3% of the stock price for 15 points of protection, while keeping all the upside. Key takeaways: – A skip-strike butterfly can replace a short call spread around earnings. – Aim for about 10% of the skipped width in credit. – Front spreads against owned stock trade some premium for extra upside. – Put spreads offer cheaper short-term protection than outright puts. Options involve risk. This episode is educational and not a recommendation. |
