Option Strategies to Capitalize on Apple's Range Breakout

May. 9.11 | About: Apple Inc. (AAPL)

This is the fifteenth article in a series on Apple (AAPL) option strategy. Apple is a very unique company due its combination of size ($320B), 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%)]:

The investment community justifiably focused primarily on macro-level events and commodities markets while Apple specific events took the backseat. With the NASDAQ rebalance past us, we can focus on fundamental news for Apple. A wave of competitors are (re)entering the tablet market; however, there is no reason to believe that they will come close to unseating Apple. No other player controls even five percent of the market; therefore, it is a pipedream to believe that these “new and improved” offerings pose a threat. Apple often falls into this pattern of trading in a narrow range after reporting earnings and this is occurring again. A strategy of selling puts and calls can generate strong profits coupled with a protective resistance level.

Below, I present three possible scenarios and the potential returns for the May 13 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.

click to enlarge

Apple May 8 OptionsClick 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 May 8 Sensitivity AnalysisClick to enlarge

With this information, executing a buy-write on AAPL May 13 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 340s and 345s are attractive for this purpose. Think about it: would you be willing to receive $2 to potentially be forced to buy Apple at $345? 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 May 13 360 calls.