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Apple shares have surged since their fake-out bottom just days ago when they shook out technicians by violating their 200-day moving average for the first time since April of 2009. AAPL closed last week at $359.71, up from that recent intra-day low of $310.50.

[Click to enlarge]

Many Apple bulls think this month’s earnings release will jump start the shares on their way to $400 by year end. That would represent a gain of 11.2% from last week’s close.

Option-savvy traders with decent sized bankrolls could end up doing much better with less risk by setting up a combination play out to January 2012.

Cash Outlay

Cash Inflow

Buy 100 AAPL for $359.71 /share

$35,971

STO 1 Jan. 2012 $360 call at $29.70 /sh.

$2,970

STO 1 Jan. 2012 $360 put at $28.90 /sh.

$2,890

Net Cash Out-of-Pocket

$30,111

If AAPL merely closes at $360 or better on Jan. 20, 2012:

  • The call will be exercised and the put will expire worthless.
  • You’ll be left with no shares and $36,000 in cash.

Your net profit would be $36,000 - $30,111 = $5,889.

$5,889 / $30,111 = 19.5% cash-on-cash on any move up of 29 cents or greater.

If AAPL closes below $360 on Jan. 20, 2012:

  • The call will expire and the put will be exercised.
  • You’ll be forced to buy another 100 AAPL shares.
  • You’ll need to lay out an additional $36,000 in cash.
  • Your final position will be 200 AAPL.

Total outlay for the 200 shares = $30,111 + $36,000 = $66,111.

Breakeven on the whole trade would be $330.55 /share or 8.1% below our trade inception price.

Here’s a nice chart to show how the outright buyer of AAPL would do compared with our combination buy/write (at various final closing prices on expiration date).

Price on

Jan. 20, 2012

Bought AAPL for $359.71 /share

Profit or

(Loss)

Bought AAPL

Sold $360 C & P

Profit or

(Loss)

$300

($59.71)

(16.6%)

($30.55)

(9.2%)

$320

($39.71)

(11.0%)

($10.55)

(3.2%)

$340

($19.71)

(5.5%)

$29.45

9.8%

$360

$0.29

0.08%

$58.90

19.5%

$380

$20.29

5.6%

$58.90

19.5%

$400

$40.29

11.2%

$58.90

19.5%

$420

$60.29

16.7%

$58.90

19.5%

$440

$80.29

22.3%

$58.90

19.5%

If Apple finishes on expiration day anywhere from $300 to $420, the combination writer will either lose less or make more profits percentagewise than the outright buyer of APPL shares. It would take a very large move up or down for the owner of the shares at today’s price to do better than our conservative option strategy will perform.

Depending on your own conviction on where AAPL might end up by next January, you can tweak the strike prices shown in this example to allow for more upside or increased downside protection.

Source: Taking a Bite Out of Apple With Less Risk but Fine Upside Potential

Additional disclosure: I am short AAPL puts