Capitalize on Apple's New All-Time High With Options

Jul.11.11 | About: Apple Inc. (AAPL)

Apple (AAPL) is a unique company due its size ($330B), earnings growth rate (95%), and volatility (1.4β). 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.

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AAPL Weekly ChartClick to enlarge

A brief recap of this week in Apple (up $16.71 (4.9%)):

Isn’t it amazing what can happen to a stock in a one-month period? Apple is now approaching a fresh all-time high. On June 20, Apple hit a low of $315.32 and has since rocketed over $40 back to a $330B market capitalization. Take this past month as a lesson in trading Apple or any other high-growth stock: Do your fundamental homework and update it frequently with news (such as that listed above). If the fundamentals of the stock do not change, then there is no need to panic.

Apple was the same high quality company on June 20 as it is today. Rocco Pendola has stressed that Apple’s stock price frequently diverges from its fundamental value. This only highlights why you can generate significant cash on a weekly basis by selling options against your underlying holding. The majority of options expire worthless and you need to be on the sell side to take advantage of time value.

Below I present three possible scenarios and the potential returns for the July 16 weekly options (Source: TD Ameritrade). The first scenario represents a negative outlook for Apple, while the final two scenarios are more realistic. 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.

AAPL Option ChainClick 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.

AAPL Weekly Sensitivity AnalysisClick to enlarge

With this information, executing a buy-write on AAPL July 16 (Weekly) 360s is the optimal risk-return strategy. If you are uncomfortable with this approach, I suggest utilizing the 355s. An alternative approach is to sell out-of-the-money 350 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 350 short straddle can yield gains but I would avoid it with Apple at a new high.

Disclosure: I am long AAPL; short AAPL July 16 350 and 360 Calls.