Why Apple Is a Safe Haven From a U.S. Default

Aug. 1.11 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is a unique company due its size ($360B), earnings growth rate (125%), and volatility (1.3β). 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.

AAPL Weekly ChartClick to enlarge
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A brief recap of this week in Apple [Up $0.13 (0.0%)]:

  • China Orders Some Fake Apple Stores To Close (July 25 Reuters)
  • Rumors of iPhone 5 in September; iPad 2+ in November Grow (July 27 Apple Insider)
  • Apple Has Largest Non-Financial “Cash” Stockpile (July 27 Business Journal)
  • 35% of Consumers Plan to Buy iPhone 5 Sight Unseen (July 27 CNN)
  • iOS Secures Largest Mobile Marketshare (July 28 Fortune)
  • Motorola (NYSE:MMI) Ships Only 440K Xoom Tablets in Quarter (July 28 Apple Insider)
  • Apple Now World’s Largest Smartphone Vender (July 29 Business Wire)
  • Google (NASDAQ:GOOG) Acquires 1,000+ Patents From IBM (July 29 Bloomberg)
  • U.S. “Available” Cash Now Lags Apple’s Cash Stockpile (July 29 Financial Post)
  • Apple Controls Over Sixty Percent of Mobile Phone Profits (July 29 Asymco)
  • Justice Department Investigating Apple Over Nortel Patent Purchases (July 29 Wall Street Journal)

I like to call this time of the year the calm before the storm. By most analysts’ and tech pundits’ estimates we will witness Steve Jobs announce the iPhone 5 in August with the official launch in the following month. With such strong brand loyalty, this will be another banner quarter for Apple. Apple’s stock might get dragged down in the intermediate term with the rest of the market as the debt ceiling looms but there are numerous reasons why Apple is going to $500. I would use this as an opportunity to accumulate Apple at a discount and write calls against your holdings. Even if the debt discussions get more tumultuous, this is a non-Apple specific issue and will likely be short lived. Even as the US economy weakens Apple’s prospects are still strong, especially considering the 247% increase in Asia Pacific sales. Even if the U.S. stutters, Apple’s global growth will more than mask and decline in sales.

Below I present three possible scenarios and the potential returns for the August 5 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
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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.

AAPL Sensitivity AnalysisClick to enlarge
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With this information, executing a buy-write on AAPL August 5 (Weekly) 395s is the optimal risk-return strategy. If you are uncomfortable with this approach, I suggest utilizing the 390s or 400s. Even if you do not normally write covered calls, I believe this is a profitable strategy as forced profit taking. An alternative approach is to sell out-of-the-money 390 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). In the past I have recommended a short straddle but that would be imprudent with a U.S. default induced correction looming.

Disclosure: Author is long AAPL and GOOG; plans to write AAPL August 5 400 Calls.