Let’s talk both…

Apple’s huge and is up nicely after hours.

Riverbed, not so much. Let’s talk both.

First, Apple.

What a blow out quarter. The company didn’t just find that bar that had been raised as I’d mentioned, but they blew past it. Great numbers on the top and bottom lines — a 25% beat on the bottom line, is much bigger than even Google’s beat last week. And 9.25 million iPads meets the high bar I’d said was set there.

Stock’s up $25 after hours. Of course I wish I’d bought calls now. But I’ll take the gains on the common tomorrow and count my blessings.

Second, Riverbed.

The quarter was in line, but this company, like Apple, had a very high bar set for it and “in line” is disappointing the bulls.  The stock would probably be down fractionally if the company had simply reported that “in line” quarter.  But the stock’s down $10 after hours (after its $2 rally today) because they also announced that they’re spending a couple hundred million dollars buying some smaller competitors.  Fact is, both of these acquisitions are very smart and the big one will add to earnings next year.

Now let’s talk trading strategies.   Remember on July 1st, when I sold down my Riverbed and took some nice profits in the name?  Here’s what I wrote at the time:

Let’s say you did what I did in the past few weeks and you’ve now got both some common and some calls in Riverbed.  If you have say, 1000 shares of Riverbed and, say, 10 calls that expire in 2012 at, say, a $36 strike price, you’re sitting in great shape right now, obviously, as the stock has run from $32 to $40 in the seven days since then.

And it’s time to take some of that now outsized exposure off the table.  Because those $36 strike price calls are now well into the money, those calls will basically increase almost a dollar in value for each dollar the stock goes up for here.   So if you paid $3.50 for those calls back seven trading days ago, they’re now worth more than $8 and you’ve also got all those common shares and you’ve got exposure on any and all upside to this stock now (and will maintain that full exposure so long as the calls remains deeply in-the-money) to about 2,000 shares of Riverbed (1000 common and 10 call options*100 shares per each option = 2,000).

So here’s why we sell the common and not the calls now.

Because what happens if we’re wrong about something with this stock or what happens if the broader markets go under a new harsh, short-term sell off and the stock falls from here.  Let’s say it falls all the way back to $30, in perhaps a worst-case-scenario (remember, that’s only 6% higher than it was just seven trading days ago, so don’t think it can’t happen, even if just as another quick fall and bounce).

If Riverbed were to fall to $30 and you held all your common stock, you’d lose the full $10 as it fell from $40 to $30 and that would result in a $10,000 drawdown (which essentially means falling from the highest valuation on paper).   But if you held onto your calls and had sold your common instead, you’d basically stop losing much value on those call options as the stock would fall past $36.  That is, they essentially act as a natural stop loss for you at $36 or so and if you paid $3.50, that means you’re truly stopped out at $32.50.

And that’s why we’re selling some of our common (not all of it) in this name.  It’s still my biggest position, but we’ve now locked in some gains and have the flexiblity to strike again if the opportunity to do so arises again.

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Cody here again in real-time.  We’re going to get that opportunity to buy some Riverbed back at about the same levels we were buying it just about four weeks ago.  And because we took some profits we’ve got the flexibility to act on that opportunity.   I probably won’t try to catch Riverbed’s falling knife tomorrow, but in coming days, I do plan on building this positon back up to where it was before we sold it down.  Don’t get me wrong — I’m pissed at myself for not having sold nearly all of this at the highs.  I do feel like an idiot.

But realistically, nobody catches every trade perfectly and I can’t expect myself too either.

Told you there’d be fireworks!

See you tomorrow.