Apple (AAPL) is a unique company due its size ($300B), 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 this and other articles to fully understand the strategy and its strong potential returns.
A brief recap of this week in Apple -- down $19.80 (-5.7%):
- Apple Details iOS5, iTunes Match, OS X Lion, and iCloud at WWDC (June 6 Apple)
- Analysts Optimistic About iCloud and Related Offering (June 7 Apple Insider)
- Steve Jobs Presents Plans For New Apple Campus (June 7 TechCrunch)
- Apple Foreign Sales Almost Double Year-Over-Year (June 9 Apple Insider)
- Apple Grants Publishers More Rights in iTunes (June 9 Wall Street Journal)
- Apple Recalling “Extremely Small Number” of Verizon (NYSE:VZ) iPad 2s (June 10 Wall Street Journal)
Apple had its worst weekly performance since late March as the company declined almost six percent in the aftermath of WWDC. This is in stark contrast to a decline of 2.3% for the S&P 500. Should Apple have declined over three percent more than the market did?
Apple’s new iCloud will help to maintain its competitive advantage over rivals and further strength its barriers to entry. It is true that there was no new iPhone announced, but besides this omission, virtually all of the news this week was positive. I was optimistic that Apple would have increased when a seemingly healthy Steve Jobs appeared at the Cupertino town hall to announce the plans for a new Apple headquarters. This is a disturbing signal that Apple could be stuck in this depressed range until the next earnings announcement.
Below I present three possible scenarios and the potential returns for the June 18 monthly 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.
With this information, executing a buy-write on AAPL June 18 (monthly) 325s is the optimal risk-return strategy. If you are uncomfortable with this approach, I suggest utilizing the 320s. Conversely, to increase potential returns, the 330s may be more appropriate. An alternative approach is to sell out-of-the-money 320 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 close out the position). As I have detailed in the past a 325 short straddle can work; however, I do not feel that the potential return of $6.80 compensates for the risk with the market in such a tailspin.
Disclosure: Author holds long positions in AAPL and VZ; plans to write June 18 330 Calls.