The spread has been constructed in three parts. First, a calendar spread was opened at the 535 strike when Apple was trading at 531. This set the trade Delta long and Vega long. With the Apple volatility so low post earnings, the odds are Apple volatility will move higher. Second, Apple reversed its trend. A diagonal (520/515 put) was opened below the money (at the time 527).
Third, price continued downward. I examined the daily chart (right) and determined that the price had a good chance of closing the gap on the daily chart near 515. I added a 10-strike wide butterfly in the puts.
The weekly and monthly charts show Apple is at worst undecided and best bullish; so I am comfortable taking a more neutral stance in the short term. I’m more concerned about up than down, in other words, but not by much.
Lastly, one will note that the open interest at key strike prices is significant, indicating that prices might hold up for enough time at these strikes to secure profitability.
If Apple’s price shows a strong downward movement, the obvious first adjustment will be to take off the 335 strike calendar. If Apple pins at 515, the butterfly will profit handsomely, covering the loss on the calendar spread.
From the standpoint of market maker mathematics, the 535C and 515P strikes are .25/-.25 Delta respectively. There is a 50% chance that either of these strikes will be touched by Friday. The likelihood of the spread closing in the money with no further adjustments is about 64% or nearly within 1 standard deviation.
Note: Selling to close the calendar (or butterfly) spread for an adjustment will demand some capital acquiescence; for the market will be trading away from the strike. (Note: it is better to close one side at .20/-.20 Delta for the spread; to wait to close will only increase the chances that the market rebounds quickly thereafter– costing the trader a little more money and much more anguish).