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Apple (AAPL) was cofounded by the late visionary Steven Paul Jobs and has completely transformed every industry it operates in. The focus on innovation has made Apple one of the largest and best performing companies in the world. 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. As we enter the post-Jobs era, it is even more important to keep a close eye on your investment and execute care with your trades: since Jobs has passed the company’s performance will be under a magnifying glass.

(Click charts to expand) AAPL Chart

A brief recap of this week in Apple [Up $0.13 (0.0%)]:

  • Google’s (NASDAQ:GOOG) Schmidt Believes Developers Will Pick Android Over iOS (December 6 CNet )
  • Apple Named a Top 10 Stock for 2012 By Fortune (December 8 Fortune)
  • Apple Opens Grand Central Station To Thousands of Fans (December 9 TUAW)
  • Motorola (NYSE:MMI) Wins Injunction Against Apple in Germany (December 9 Apple Insider)
  • Samsung (OTC:SSNLF) Prevails Over Apple Regarding Galaxy Injunction (December 9 Apple Insider)
  • HP (NYSE:HPQ) To Continue Development of WebOS and Make Tablets (December 9 Tech Crunch)
  • China Unicom (NYSE:CHU) Allowed To Sell iPhone 4S in China (December 10 Fortune)

Despite a nearly eight point swing, Apple ended the week essentially unchanged. The beginning of the week was relatively uneventful for Apple and the volatility was likely due to the current macroeconomic events in Europe. These large swings reveal how you can generate significant returns on your core long-term Apple holding by using options. For example, executing on my strategy from last week I sold AAPL Dec 9 (Weekly) 2011 405.0 Calls at $1.39 per contract. I am very bullish on Apple ahead of its next earnings and iPad 3 announcements so I chose to be more conservative with a 405 strike but even greater returns could have been realized with a 395 or 400 strike. As you can see, even conservative option strategies can be quite profitable without assuming tremendous risk.

Mark Hulbert at Marketwatch has a great article on mutual fund window dressing. To summarize, money managers sell losers and buy winners before reporting so that they can create the illusion that they owned the “hot stocks” throughout the period. With a year-to-date increase of 22% Apple certainly fits the classification of a winner that money managers will likely buy. The effect may not be extremely large because Apple’s ownership is currently at 70% but this is one of the very real behavioral finance inefficiencies that you can take advantage of.

In closing I would like to remind you that you should not be perturbed by the ongoing litigation. The legal battles continue to rage with Samsung and Motorola but I stand by my belief that this is largely noise and will not have a material impact on Apple in the long term.

Below I present three possible scenarios and the potential returns for the Apple options. 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 Chain

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

With this information, executing a buy-write on AAPL December 17 (Monthly) 400s is the optimal risk-return strategy. If you are uncomfortable with this strategy I suggest a buy-write 390s, 395s, or 405s. Even if you are extremely bullish you can still profitably sell covered calls; Apple is volatile enough that you will have opportunities to repurchase on dips. 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).

Source: Apple: Buy The Stock Money Managers Will Be Buying