Bull Calendar Spread A Good Options Play For Apple

| About: Apple Inc. (AAPL)

Apple's (NASDAQ:AAPL) stock has been all over the place as of late, as it is hit with one bad news event after the next. The stock dropped below $500 on Monday before rebounding on Tuesday to close at $533.90, an increase of almost 3%. Until things settle down, trading options may be your best bet.

Apple's rebound Tuesday is partly attributable to the bone Samsung threw it by not pursuing a patent lawsuit against it in Europe. Apple also benefited from the overall lift the markets received from news that President Obama and House Speaker Boehner may be close to reaching an agreement over the fiscal cliff.

Contributing factors to the derailment of Apple's stock range from the infamous map app debacle to supply chain issues. Analysts have piled on, cutting and lowering their ratings and price targets for the stock, which has further sapped investor confidence.

While Apple has experienced problems as of late, I don't think they warrant the sell off we've seen. The world's most valuable company loss almost $180 billion of its market cap between Sept.19 and Dec. 14. That's staggering, but the company's market cap is still a considerable and significant $500 billion (at the time of writing). That's nothing to sneeze at.

I think the next major catalyst to move the stock will happen next month when Apple reports its first quarter earnings for 2013. The specific date is Jan. 24. In the meantime, if you have the stomach to trade options, you may consider the calendar spread strategy. This is when you sell and buy a call with the same strike price, but with different expiration months. As pointed out by theoptionsguide.com, the idea behind the calendar spread is to sell time. In Apple's case, this strategy could reduce the costs of getting upside exposure to Apple's earnings catalyst.

If you are bullish on Apple, like me, consider the calls with 550 strike prices. More specifically, consider selling the January 550 call and buying the February 550 call.

At the time of writing, before Wednesday's opening bell, the January 550 call expiring Jan. 18 had an open interest of almost 25,000. Roughly 5,500 contracts had been traded. For the February 550 call, the open interest was 16,000 and 1,200 contracts had been traded. These are slightly out-of-the-money, which is what you want with a bull calendar spread.

I'll refer to theoptionsguide.com again, which notes that you want the underlying stock, which is Apple in this case, to remain unchanged at expiration of the near month options so that they expire worthless. For this strategy to work with Apple, the time decay of the January option must be faster than the February option, so that the February option still retains much of its value. You can then either own the February call for less or write more calls and repeat the process.

If the trade goes bad and Apple's stock skyrockets before the January expiration, the maximum risk is the premium you pay up front. Of course, you'll benefit if the price goes up above $550 come February.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.