Apple (AAPL) is a unique company due its 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. 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 $2.34 (0.7%):
Jobs to Officially Announce iCloud at WWDC (May 31 Apple)
iCloud Music Label Deal Rumored To Cost $100M (June 3 NYPost)
DoJ Investigating Apple Patent Acquisitions (June 4 Wall Street Journal)
Apple Passes RIMM For Most Active U.S. Smart Phone Users (June 3 Apple Insider)
The Number One Reason to Buy Apple Right Now (June 3 Seeking Alpha)
Today Steve Jobs will return to Apple to lead the Worldwide Developer Conference where Apple has historically announced its newest iPhone, software developments and essentially laid the roadmap for the company’s plans. As I have stressed, now is a great time to go long Apple and prepare for the summer/fall potential range breakout. Having said that, there is a tremendous opportunity to sell options as well because the time value ratios for the 345s are greater than 1%. While it is tempting to simply write calls and collect cash today, I would avoid writing calls against your entire position (I suggest 50% or less) to maintain some upside potential. Be ready to sit back and watch Steve Jobs’ do what he does best and take the stage for One More Thing.
Below I present three possible scenarios and the potential returns for the June 10 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.
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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.
With this information, executing a buy-write on AAPL June 10 345s is the optimal risk-return strategy. If you are uncomfortable with this level of risk, I suggest utilizing the 340s. Conversely, to increase potential returns the 350s may be better for your individual strategy. An alternative approach is to sell out-of-the-money 340 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 have detailed in the past a 340 short straddle can work; however, I do not feel that the potential return of $6.00 compensates for the risk with a volatile week ahead.
Disclosure: Author holds a long position in AAPL and plans to write June 10 350 Calls.
Additional disclosure: Disclosure: Author holds a long position in AAPL and plans to write June 10 350 Calls.