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This is the tenth article in a series on Apple (NASDAQ:AAPL) option strategy. Apple is a unique company due its combination of size ($315B), earnings growth rate (75%), and volatility (1.4β). This presents an exceptional opportunity for investors to capitalize on both its long-term capital gain prospects and short-term option premiums. For reference, please view the first and other articles in the series to fully understand the strategy and its strong potential returns.

A brief recap of this week in Apple [Down $8.59 (-2.4%)]:

  • Potential Apple Battery Delays (Mar. 28 Wall Street Journal)
  • iPhone 5 May Not Launch Until Fall (Mar. 28 Apple Insider)
  • Apple WWDC Scheduled for June 6 (Mar. 28 Apple)
  • Amazon Launches Cloud Drive (Mar. 30 New York Times)
  • Apple Accepting Higher Costs to Secure iPad Components (Mar. 31 Gigaom)


This week in Apple stands in contrast to the past few because there was minimal real news surrounding the company. There are still lingering concerns that Apple’s products will face delays due to the Japanese earthquake but those do not detrimentally impact me as a long-term investor. With customers still lining the streets to buy the iPad 2, the wait poses minimal concern. Having said that, do you believe that Apple should have declined nearly nine dollars per share off of already depressed levels? I certainly do not. It is possible that some of the decline was due to the news of Apple owing potential royalties to Eastman-Kodak (EK) for patent infringement; however, that seems unlikely. The largest culprit is likely Amazon’s (NASDAQ:AMZN) launch of Cloud Drive, which has the potential to drive sales away from iOS devices. It has been widely expected that Apple will launch a revamped MobileMe service that will counter any offering that Amazon has.

Also for your consideration I have presented the PE ratios of a few of Apple’s notable rivals. Would you rather buy Apple trading below 18X (before adjusting for cash) or would you rather overpay for its competitors?

  • Google (NASDAQ:GOOG): 26.3
  • Netflix (NASDAQ:NFLX): 81.8
  • Amazon (AMZN): 71.2

Below I present three possible scenarios and the potential returns for the April 1 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 of loss 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 3: AAPL Closes at $349 (50 Day SMA)

Strike

Price

Return

Return %

Annualized

Downside Protection

330

$15.00

$0.44

0.13%

9.32%

4.23%

335

$10.70

$1.14

0.33%

24.15%

2.77%

340

$6.90

$2.34

0.68%

49.58%

1.32%

345

$3.85

$4.29

1.25%

90.89%

N/A

350

$1.76

$6.20

1.80%

131.36%

N/A

Additionally, if you would like even more information, I have prepared a sensitivity analysis for absolute return and percent returns, respectively. After studying the information above, these two charts make it easy to pick a strike price based on where you believe Apple will close on Friday.

(Click charts to enlarge)
Apple April 8 Option Sensitivity Chart

Based upon the details presented above, I am of the opinion that executing a buy-write on AAPL and selling the Apr. 8 345s is the best strategy due to its risk-return profile. If you are uncomfortable with this level of risk, I would suggest utilizing the 340s. Conversely, to increase potential returns, the 350s may be a better choice for your individual strategy.

As many great SA users have pointed out, an alternative strategy is to sell out-of-the-money puts on Apple and collect the premium without having to purchase the stock outright. The 330s, 335s, and 340s are all attractive for this purpose. If I did not have an Apple position I would consider selling these puts. Think about it: would you be willing to receive $3 to potentially be forced to buy Apple at $340? However, always remember that if the stock goes down to the strike price, there is the obligation to buy the stock (or close out the position).

Source: Waiting to Buy an iPad? Buy Apple Stock Instead