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The recent price action for Apple (AAPL) has belied rational explanation. That hasn't stopped a few dozen Seeking Alpha contributors from trying. I must admit that I read every attempt at explaining why AAPL should move higher or plummet (and why the authors were right in an article they wrote a few weeks earlier - for some strange reasons, there aren't many follow-up articles explaining how wrong they were). It is sort of like reading the comic section of the local newspaper (many years ago, comics were called funnies which really seems more appropriate).

Volatility has been much greater for AAPL than it has been for the market in general (SPY). I, for one, unabashedly admit that I have absolutely no idea why the stock has jumped all over the place like it has. Particularly last week when it fell almost 9% on essentially no news whatsoever (and what news there was seemed like it should be bullish for the stock, such as the company announcing that some Macs will be made in the good old U.S.A. and Tim Cook hinting that an iTV product might be on its way).

So how can someone play the excessive volatility that AAPL has displayed lately? I trade AAPL options nearly every day, and it has seemed to me that most of the extreme price changes have been taking place on Mondays and Fridays, so I thought I would go back and check that out. Here are the results for the last twelve weeks, a period over which the stock has fallen from its closing high of $702.10 to its current $533.25, a drop of about 24%:

Net Change

Net Change

Opening

Opening

For Day

For Day

Change

Change

Fridays

Mondays

Fridays

Mondays

$9.80

$38.05

$6.89

$13.03

$9.31

$24.08

$6.16

$11.21

$2.06

$18.03

$5.47

$9.34

$1.61

$8.46

$4.32

$8.37

$1.39

$7.78

$2.67

$7.09

-$4.08

$5.02

$2.66

$7.09

-$5.52

$0.91

$2.06

$5.50

-$13.99

-$4.23

$1.43

$5.35

-$14.15

-$7.68

$1.29

$4.40

-$14.15

-$8.64

$0.53

-$2.74

-$19.65

-$9.26

-$0.42

-$6.37

-$22.69

-$14.35

-$2.57

-$10.05

There have been 9 days when double-digit price changes occurred in the stock, 6 drops of over $10.00 and 3 rises of over $10.00. All of the big up days occurred on Mondays and 5 of the 6 drops occurred on Fridays.

The most likely explanation for this strange distribution of fluctuations is that on Fridays, Weekly options expire, and many investors who own the stock may be writing (selling) calls for the next week against their stock. Since most options trades are executed by market makers or institutional traders, they now own the calls that the writers have sold. In order to balance out their risk (net delta), these professionals must sell stock, thus depressing the price. On Mondays, other investors look at the lower price for AAPL, recheck the fundamentals, and decide that they might buy a few calls. Now the professionals would be selling those calls and will need to buy shares to balance out their risk positions.

Whatever the reason for the predominantly lower prices on Friday and higher prices on Monday, there are some ways to play this phenomenon using Weekly options (in hopes that the pattern might continue into the future).

If you were to buy Weekly puts in advance of the Friday trading, an at-the-money put would cost about $5 ($500) at the open Friday or at the close on Thursday (actually, most Fridays, that put could be bought at the opening for about $4, but let's work with the higher number so as not to be accused of over-stating our case). If the past 12-week pattern continued, you would about break even in 2 weeks, lose an average of $400 in 5 weeks, and make an average of $1200 in 5 weeks if you sold at the close on Friday. Over the past 12 weeks, you would have made a net gain of about $4000 on your $500 bets each week.

It is not as easy to calculate your possible gains or losses if you were to buy calls in advance of the Monday trading because options don't expire on Mondays. But we can make a guess. An at-the-money call might cost about $11 at the beginning of trading on Monday. If you sold that call at the close of the day on Monday, you would lose an average of about $100 from the daily decay on the 7 Mondays when the stock fluctuated the least (all those days except the 3 big up days and the 2 big down days). Your loss in the 2 days when the stock fell an average of $11.81 would be about $650 each day for a total of $2000 losses in the 9 net losing days. However, on the 3 days when the stock advanced an average of $26.27, your average gain would be about $1700, or $5100 for those 3 days. For the 12-week period, your total net gain would have been $3100 on an average weekly bet of $1100.

Bottom line, if history repeats itself, you can make good money by buying calls before Monday trading starts and buying puts prior to Friday trading (and closing out all positions at the end of those days). But even better results can be achieved by timing the purchases.

Most interestingly, the above table shows that even though AAPL fell 7 out of 12 Fridays, it actually opened higher in 10 of those 12 weeks. If you had waited until shortly after the market opened on Friday morning to buy your puts, your gains would have been far greater than those outlined above.

On the call side, AAPL opened higher 9 out of 12 times on Monday. Your best bet would have been to buy calls on the previous Friday near the close to take advantage of lower call prices at that time. Again, your gains would have been greater than those outlined above.

Of course, the fatal flaw in these trade possibilities is that history will not repeat itself. Sometimes it does, and sometimes it doesn't. I have absolutely no idea if it will continue or not. That is up to each one of us to decide for ourselves. I think there is a good chance that the pattern might continue, however, and I will try it on a small scale, playing with money I can afford to lose (admittedly, there is not much left in that department because I have been long AAPL options for the last 12 weeks).

By the way, professionals usually play this kind of volatility differently than merely buying puts or calls. When implied volatility is greater than actual volatility, as it has been for at least the past 12 weeks, the smart money is buying straddles, strangles, or back spreads. The problem with all three of these spreads is that they are negative theta - you lose money every day that not much happens in the market. I am not comfortable owning positions with negative theta, and rarely do it.

Most of the time, I much prefer owning calendar or diagonal spreads and collecting premium decay every day that the underlying doesn't do much. Those spreads have not done well using AAPL for the last 12 weeks, obviously (given the extreme volatility).

It looks to me that the time has come to consider the outright buying of AAPL puts shortly after the open Friday mornings and buying AAPL calls near the close on Friday. If the last twelve weeks are any indication, such a strategy could be extremely profitable over the next twelve weeks.

Source: Play Apple Volatility With A Unique Weekly Options Strategy

Additional disclosure: I own and am short both puts and calls on AAPL and SPY.