Option Strategies to Profit From Apple's Blowout Quarter

Apr.25.11 | About: Apple Inc. (AAPL)

This is the thirteenth article in a series on Apple (AAPL) option strategy. Apple is a very unique company due to its combination of size ($325B), earnings growth rate (95%), 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 [Up $15.90 (4.7%)]:

  • AT&T (NYSE:T)/Verizon (NYSE:VZ) Not Yet Supporting Playbook Fully (Apr. 19 Wired)
  • RIMM’s Playbook Has Poor Launch (Apr. 19 Reuters)
  • Apple’s Earnings Release (Apr. 20 Apple)
  • Apple’s Earnings Transcript (Apr. 20 Seeking Alpha)
  • iPad 2 Ship Time Reduced to 1-2 Weeks (Apr. 20 Apple)
  • Apple Planning 10th Anniversary Retail Store Events (Apr. 20 Apple Insider)
  • Apple and Samsung Trade Lawsuits (Apr. 21 Wall Street Journal)
  • iTunes Music Streaming Reportedly Ready For Launch (Apr. 21 Reuters)

The strategy in April has been to take advantage of depressed levels to reduce your basis. For this week review Apple news, read the full earnings release, and bask in the restored Apple valuation. Going forward the focus will return to iPhone 5 release-date rumors, Steve Jobs health, and other product/service news. This is largely noise. Apple is now the largest handset producer by revenue and that lead will only grow with new iPhone versions, even if released a few months later than usual. The June quarter may have weaker iPhone sales as consumers delay purchases but this will be masked as Apple continues to sell every iPad it can make. Remember that Apple may still face selling pressure from the NASDAQ rebalancing but this is only a short-term speed bump.

Below I present three possible scenarios and the potential returns for the April 28 weekly options (Source: TD Ameritrade). The first scenario represents a 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 greater potential return but additional risk of loss due to the lower (or lack of) downside protection. For more information on the fundamentals of covered calls, consult Investopedia.

  • Scenario 1: AAPL Closes at $333.17 (Down 5%)
  • Strike
  • Price
  • Return
  • Return %
  • Annualized
  • Downside Protection
  • 340
  • $11.40
  • ($6.14)
  • -1.75%
  • -127.70%
  • 3.05%
  • 345
  • $7.30
  • ($10.24)
  • -2.92%
  • -213.05%
  • 1.63%
  • 350
  • $4.20
  • ($13.34)
  • -3.80%
  • -277.57%
  • 0.20%
  • 355
  • $2.06
  • ($15.48)
  • -4.41%
  • -322.12%
  • N/A
  • 360
  • $0.95
  • ($16.59)
  • -4.73%
  • -345.23%
  • N/A
Click to enlarge
  • Scenario 2: AAPL Closes at $350.70 (Unchanged)
  • Strike
  • Price
  • Return
  • Return %
  • Annualized
  • Downside Protection
  • 340
  • $11.40
  • $0.70
  • 0.20%
  • 14.57%
  • 3.05%
  • 345
  • $7.30
  • $1.60
  • 0.46%
  • 33.30%
  • 1.63%
  • 350
  • $4.20
  • $3.50
  • 1.00%
  • 72.85%
  • 0.20%
  • 355
  • $2.06
  • $2.06
  • 0.59%
  • 42.88%
  • N/A
  • 360
  • $0.95
  • $0.95
  • 0.27%
  • 19.77%
  • N/A
Click to enlarge
  • Scenario 3: AAPL Closes at $351.30 (50 Day SMA)
  • Strike
  • Price
  • Return
  • Return %
  • Annualized
  • Downside Protection
  • 340
  • $11.40
  • $0.70
  • 0.20%
  • 14.57%
  • 3.05%
  • 345
  • $7.30
  • $1.60
  • 0.46%
  • 33.30%
  • 1.63%
  • 350
  • $4.20
  • $3.50
  • 1.00%
  • 72.85%
  • 0.20%
  • 355
  • $2.06
  • $2.66
  • 0.76%
  • 55.37%
  • N/A
  • 360
  • $0.95
  • $1.55
  • 0.44%
  • 32.26%
  • N/A
Click to enlarge

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.

Apple April 28 Sensitivity AnalysisClick to enlarge
(Click charts to expand)

With this information, executing a buy-write on AAPL Apr. 21 350s is the best strategy due to the risk-return profile. If you are uncomfortable with this level of risk, I suggest utilizing the 345s. Conversely, to increase potential returns the 355s 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 345s and 350s are attractive for this purpose. Think about it: would you be willing to receive $3 to potentially be forced to buy Apple at $350? Note that if the stock declines to the strike price, you are obligated to buy the stock (or closeout the position).

Disclosure: Author holds a long position in AAPL and plans to write April 29 355 Calls.