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Apple (AAPL) is a unique company due its size ($330B), earnings growth rate (125%), and volatility (1.3β) (click to enlarge images):

AAPL Weekly Chart

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 [down $15.30 (-4.2%)]:

  • Google Acquires Motorola Mobility for $12.5B (August 16 Wall Street Journal)
  • Galaxy Tab European Ban Partially Lifted (August 17 Wall Street Journal)
  • Analysis of Apple’s “Strategy Strategy” (August 18 Bloomberg)
  • Apple Targeting Counterfeit Products Sold in New York (August 18 Reuters)
  • HP Discontinues Disappointing Playbook (August 18 PCMag)
  • Steve Jobs Has Met Personally With China Mobile Execs (August 18 Reuters)
  • Retina Display iPad 3 Rumored For Early 2012 (August 19 Wall Street Journal)
  • High Level AT&T Source Rumors Early October iPhone 5 (August 19 BGR)

There are now two constants for Apple: volatility and underperforming competitors. The big news this past week was Google (GOOG) is acquiring Motorola (MMI) in a defensive move primarily for its patents. In another shocking development, Hewlett Packard (HPQ) announced plans to completely overhaul its business and stop selling PCs.

Investors did not appear to like either of these decisions as Google and HP declined over 10 and 20 percent, respectively. With uncertainty in the Android platform and the effective killing of WebOS the market is as clear as ever for the iPad to dominate. If Android does not innovate tremendously before the iPad 3 I believe we will have a repeat of the iPod domination on our hands.

Everyday that you consider making an Apple trade I want you to ask yourself if there is any question that Apple will falter in the long term? As we approach 350 Apple is becoming a screaming buy with a PE of below 15. If you see a faster growing company with a PE that low go buy it but good luck finding one. I cannot stress enough that you need to use this as an opportunity to accumulate Apple at a discount and write calls against your holdings. There are also other tremendous trading opportunities that I will elaborate upon below.

Below I present three possible scenarios and the potential returns for the August 26 weekly options (Source: TD Ameritrade). The first scenario represents a negative outlook for Apple while the final two scenarios are more reasonable. These scenarios are just projections and there is no guarantee that they will come to fruition. 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 Chart

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 Analysis

Last week I analyzed the extreme volatility that Apple has witnessed as of late. In summary:

  • Mean absolute value price change has increased by 30.6%
  • Median absolute value price change has increased by 35.6%
  • Standard deviation has increased by 47.7%

This extreme volatility is encompassed by the fact that only weeks apart Apple had its great weekly price appreciation (25 points in late July) and depreciation (36 points in early August). So how can investors take advantage of this volatility?

With this information, buying an AAPL August 26 (weekly) 360 call/355 put Long Strangle is the optimal risk-return strategy to profit from these extreme price movements. If you are uncomfortable with this strategy I suggest an ordinary buy-write 365s, 360s, or 355s. An alternative approach is to sell out-of-the-money 350 puts and collect the premium without having to purchase the stock outright but even this is quite risky now. Note that if the stock declines to the strike price, you are obligated to buy the stock (or closeout the position).

Source: Use Apple Options to Buy on Weakness