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This is the eleventh article in a series on Apple (NASDAQ:AAPL) option strategy. Apple is a very unique company due its combination of size ($310B), 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 $6.31 (-1.8%)]:

  • iPad 2 Shipping Time Reduced to 2-3 Weeks (Apr. 4 Apple)
  • Apple Wins Reversal of $625M Patent Suit (Apr. 4 Bloomberg)
  • NASDAQ 100 Rebalancing To Reduce Apple Weighting (Apr. 5 Seeking Alpha)
  • Consumer Reports Ranks iPad 2 As Best Tablet (Apr. 5 Apple Insider)
  • Apple Ordering Storage In Preparation For Possible Media Streaming (Apr. 6 Storage Newsletter)
  • Motorola (NYSE:MMI) Xoom Sales Forecast Reduced Dramatically (Apr. 6 Apple Insider)
  • Apple Dominating Supply of Touch Panels (Apr. 7 Barrons)

There was a significant amount of Apple news this week and while the majority was positive, the NASDAQ rebalancing (NASDAQ:QQQ) appears to have outweighed any encouraging reports. Not only is Apple producing its award winning iPad faster, but its competitors are facing difficulties. As a long-term investor, I am more concerned with essential news that impacts fundamentals rather than information that could have a minimal impact on earnings. There is no denying that there will be selling pressure in April but there is still an opportunity to profit with these strategies. With a “true cash” adjusted P/E of 17 I believe that Apple is likely approaching downside resistance levels and is becoming a bargain.

Below I present three possible scenarios and the potential returns for the April 16 monthly options (Source: TD Ameritrade). The first scenario represents a very negative outlook for Apple 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, consult Investopedia.

Additionally, 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 your prediction for Apple’s closing price on Friday.

Apple April 16 Sensitivity Analysis

With this information, executing a buy-write on AAPL Apr. 16 335s would be the best strategy due to its risk-return profile. If you are uncomfortable with this level of risk, I suggest utilizing the 330s. Conversely, for those seeking to increase potential returns the 340s may be a better choice for your individual strategy. An alternative strategy is to sell out-of-the-money puts and collect the premium without having to purchase the stock outright; the 325s and 330s are attractive for this purpose. Think about it: would you be willing to receive $2 to potentially be forced to buy Apple at $330? Note that if the stock declines to the strike price, you are obligated to buy the stock (or closeout the position). For more depth, please consult a detailed option chain.

Disclosure: Author holds a long position in AAPL and has sold AAPL Apr. 16 360 calls.

Source: 3 Option Scenarios for Apple Investors