Options Trades to Profit From Apple Announcement Magic

May.31.11 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is a very unique company due its combination of size ($310B), 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. I have recommended option strategies on Apple since 2010 with tremendous results. 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 $7.44 (2.3%)]:

  • Apple Launches “Retail 2.0” In Stores (May 21 Apple Insider)
  • Foxconn Plant Closing To Have Minimal Impact on iPad Supply (May 23 Apple Insider)
  • Rumors of Grand Central Apple Store Revived (May 23 Wall Street Journal)
  • iCloud Appears Ready to Launch for WWDC (May 24 CNet)
  • Apple Wins Case to Review New Samsung Phones (May 24 Apple Insider)
  • Barnes & Noble Announces New Nook (May 24 CNN Money)
  • Google Announces Google Wallet NFC Payment Service (May 25 Google)
  • 10 Reasons Why Apple Investors Should Be Nervous (May 25 Seeking Alpha)

With Apple’s Worldwide Developer Conference a mere week away you will be reading multiple rumors daily regarding what Apple plans for the event. This is where Apple has historically announced its newest iPhone; however, it is widely expected that at best Apple will announce the iPhone “4S” rather than the true iPhone 5. Investors should remember to take everything with an extra grain of salt.

With that in mind, I strongly believe that most of the pessimism is priced into Apple: this is evidenced by the multiyear low PE. The fact that Apple is inviting British journalists to WWDC gives me confidence that Steve Jobs has a trick or two up his sleeve. Now is the time to position yourself long AAPL, be a less conservative with your options, and prepare for a little Apple magic.

Below I present three possible scenarios and the potential returns for the June 3 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 images

Apple June 3 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 June 3 Sensitivity AnalysisClick to enlarge

With this information, executing a buy-write on AAPL June 3 340s is the optimal risk-return strategy. If you are uncomfortable with this level of risk, I suggest utilizing the 335s. Conversely, to increase potential returns the 345s may be better for your individual strategy. An alternative approach is to sell out-of-the-money 335s puts and collect the premium without having to purchase the stock outright. Note that if the stock declines to the strike price, you are obligated to buy the stock (or closeout the position). As I detailed last week a 335 short straddle can work; however, I do not feel that the potential return of $3.19 compensates for the risk.

Disclosure: I am long AAPL and plan to write June 3 340 Calls.