AAPL - Fill the Gap Strategy

Chart 1: Nasdaq Composite Index

Chart 2: AAPL 52-Week Chart

Chart 3: AAPL Intra-day Chart

The following happened while I was conducting a handholding session yesterday and demonstrated a “Live” trade on a paper trading account.

AAPL announced their quarterly earnings results the night before (21 July 08 - after market close). As usual, it released a stunning set of results. But the stock gapped down at pre-market hours (as much as $18.00) due to less than expected earnings forecast. But AAPL is known to lower its analysts' expectations by lowering its forecast. A similar gap down happened in April when AAPL gave a lower than expected forecast. But the stock subsequently reversed and went up. A possible Fill-the-Gap strategy is identified.

• Checked the 3 major indices – All pointing a bear rally. Nasdaq Composite Index also showed a triple bottom in the daily chart (Chart 1)
• AAPL resting at its 38.2% Fibonacci Level before the Gapped down in its daily chart (Chart 2)
• RSI and Stochastics are at a good level in the intraday chart
• Refer to Chart 3 for Entry & Target. The stop loss is at the lowest of the first candle

Initially, I planned to enter immediately after the stock went above the ideal point - buying AAPL Aug 150 Call option for $7.00. In the midst of the excitement, instead of buying, I sold the Call option instead. I realized my mistake. By the time I closed my position and opened a new position in AAPL Aug 150 Call Option, I can only manage to enter a trade at $8.00. The mistake cost me an opportunity cost of $1.00.

In the class, I mentioned that if the stock remained around or below the 38.2%Fibonacci level (in an intraday chart) towards the end of the day, I would take my profits and run. However, if the stock hits the 61.8% Fibonacci Level, I may consider leaving the options overnight. i.e. changing my stance from a day trade to a swing trade.

The stock hovered at around its 38.2% Fibonacci level in intraday chart, which coincided with the 50% Fibonacci level in daily chart. Hence, at that level, it is a strong resistance. However, my intuition (at around 11:30pm) says that the stock will break the resistance. As to when exactly, I am not sure. It did break the resistance around 1:15pm and it went pass my two targets.

By the end of the day, the stock close around $162. My 150 Call option is deep-in-the-money with a closing price of around $14.575. That is, if I were to close my position before the end of the day, I would easily made $6.575 x 100 (before commission) per option contract or about 82.2% return in one day. I left the position open. On hindsight, I should have closed my position and opened a fresh Aug 165 Call at a lower premium (and thus locking-in my profit).

PersianCat (Millionaire-in-progress)