This is the fourteenth article in a series on Apple (AAPL) option strategy. Apple is a very unique company due 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 [Down $0.21 (-0.1%)]:
- Apple Sued Over Tracking Data (Apr. 25 Bloomberg)
- Sony Announces New Tablets (Apr. 26 Yahoo Finance)
- Opinion on Apple Location Saga (Apr. 26 Seeking Alpha)
- RIMM and Motorola Barely Competing With iPad (Apr. 28 Apple Insider)
- Apple Buys iCloud.com Domain (Apr. 29 Wall Street Journal)
Apple was punished modestly this week for ill-founded concerns that the company was tracking its users’ movements as the company quickly lost the shine of its blockbuster earnings. Steve Jobs denied the reports that likened Apple to “Big Brother” so the worst of the decline should be behind the company. I believe that this story will vanish with no real long-term impact similar to “antenna-gate."
Investors should look at the big picture: Apple is generating cash at an unrivaled rate and its competitors have no traction. Each month that Apple has no real competition increases the probability of Apple having a natural monopoly with the iPad, like it does with the iPod. Remember that the Nasdaq rebalancing this week may add additional volatility.
Below I present three possible scenarios and the potential returns for the May 6 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.
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 to enlarge
With this information, executing a buy-write on AAPL May 6 355s is the best strategy due to the risk-return profile. If you are uncomfortable with this level of risk, I suggest utilizing the 350s. Conversely, to increase potential returns the 360s 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 340s and 345s are attractive for this purpose. Think about it: Would you be willing to receive $4 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 close out the position).
Disclosure: Author holds long positions in AAPL and MMI and plans to write May 6 360 Calls.