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This is the second article in a new series of options articles that I will be writing on Apple (AAPL). I will not be writing these articles every week as the weekly options may not provide suitable return for the risk or for other reasons. Apple is a very unique company due its combination of size ($310B), earnings growth rate (75%), and volatility (1.4B).

This presents an exceptional opportunity for investors to capitalize on both its long-term capital gain prospects and short-term option premiums. Apple recently announced another year of blockbuster earnings and the tradition of analysts and other pundits demanding that Apple initiate a dividend has resumed. For a history of Apple’s dividend policy, philosophy, and exactly how much cash per share Apple has (hint: it is over $60), please read the first article in the series that I have written.

A brief recap of this week in Apple: Up $10.70 (3.2%)

  • Apple rejects Sony’s (SNE) e-reader app, reigniting speculation that Apple is increasing the restrictions placed on app developers (New York Times Feb. 1)
  • Renewed push for Apple to release its succession plan (Bloomberg Business Week Feb. 3)
  • Verizon (VZ) sells out of iPhone preorders in first day (Marketwatch Feb. 4)
  • Motorola (MMI) plans anti-Apple Superbowl (Engadget Feb. 4)
  • Verizon Survey: 44% of Android and 66% of Blackberry users likely to switch to iPhone on Day One (CNN Money Fortune Feb. 5)

As a long-term Apple investor I am not largely concerned with the Sony and succession plans. Motorola has lost touch with its core consumers and I believe that their ad campaign will have a negligible impact on Apple’s brand. The better than expected Verizon iPhone preorders and survey details are both excellent news that I believe generally justifies the price increase this week. With Apple hitting new all-time highs seemingly two or three times per week, I would not be surprised to see the stock pull back by a few percent in a week as investors understandably take profits.

Below I present three possible scenarios and the potential returns for the February 11 weekly options (Source: TD Ameritrade). The first scenario represents a very negative outlook for Apple the next week while the final two scenarios are more realistic in my opinion. As a general rule, selling calls with higher strike prices has more potential return but more risk due to the lower (or lack of) downside protection. For more information on the fundamentals of covered calls, read this excellent article on Investopedia.

Scenario 1: AAPL Closes at $329.18 (Down 5%)

Strike

Price

Return

Return %

Annualized

Downside Protection

335

$12.15

($5.17)

-1.49%

-109.03%

3.32%

340

$7.80

($9.52)

-2.75%

-200.67%

1.88%

345

$4.30

($13.03)

-3.76%

-274.41%

0.43%

350

$1.94

($15.39)

-4.44%

-324.13%

N/A

355

$0.73

($16.60)

-4.79%

-349.62%

N/A

Scenario 2: AAPL Closes at $346.50 (Unchanged)

Strike

Price

Return

Return %

Annualized

Downside Protection

335

$12.15

$0.65

0.19%

13.69%

3.32%

340

$7.80

$1.30

0.38%

27.39%

1.88%

345

$4.30

$2.80

0.81%

58.99%

0.43%

350

$1.94

$1.94

0.56%

40.87%

N/A

355

$0.73

$0.73

0.21%

15.38%

N/A

Scenario 3: AAPL Closes at $345.80 (Down <1% to 10 Day SMA)

Strike

Price

Return

Return %

Annualized

Downside Protection

335

$12.15

$0.65

0.19%

13.69%

3.32%

340

$7.80

$1.30

0.38%

27.39%

1.88%

345

$4.30

$2.80

0.81%

58.99%

0.43%

350

$1.94

$1.24

0.36%

26.12%

N/A

355

$0.73

$0.03

0.01%

0.63%

N/A

Based upon the details presented above, I am of the opinion that executing a buy-write on AAPL and selling the Feb. 11 340s is the best strategy due to its risk-return profile. This week I would personally avoid the 335s because I believe that you are sacrificing too much in terms of returns for higher downside protection. If you are uncomfortable with this level of risk in the 340s, I would suggest utilizing the 335s or not writing call this week. Conversely, to increase potential returns, the 345s or 350s may be a better choice for your individual strategy.

Disclosure: Author holds long positions in MMI and VZ. Author does not hold a long position in AAPL; however plans to purchase AAPL and sell AAPL Feb. 11 340 Covered Calls.

Source: Using Options to Profit From the VeriPhone Launch

Additional disclosure: Author holds long positions in MMI and VZ. Author does not hold a long position in AAPL; however plans to purchase AAPL and sell AAPL Feb. 11 340 Covered Calls.