A recent article on Seeking Alpha titled "Whatever You Do, Don't Do This Before Apple's Earnings" discussed the hazards of playing Apple's earnings using options. The article discusses the idea that the volatility used to price the options pre-earnings is inflated. Therefore, even if the stock moves post earnings, the options response is muted as the earnings-related volatility is removed from the price of the option.
A similar dynamic occurred in Apple's options earlier in January when Apple confirmed the January 24th date for its fiscal Q1 2012 earnings call. January options, which expire on the Friday before Apple's call, uniformly fell in value as volatility was removed as the market learned that the options will expire before Apple announces its earnings. Anyone using January calls to play Q1 earnings was disappointed.
Using options is clearly risky. It is a terrible feeling to be correct on your investment thesis, but lose money because you were wrong on the timing. Many investors will never use options to express their investment ideas simply for this fact. They have a view on value but realize that they cannot predict when the market will come to the same conclusions. Of course, using options to play an event, like earnings, helps because the timing is known.
Here are several ideas that use options to play Apple's earnings.
First, if you are long Apple stock, sell covered calls pre-earnings. If the stock increases post-earnings the potential loss by being short the call option is mitigated by the decrease in volatility. Further, if Apple sells off post-earnings, you can buy back the option at a profit. This is a way to protect yourself again a post-earnings sell off without selling your position in the common stock.
Second, utilize a call spread to get around the post-earnings volatility drop. For example, with Apple trading at approximately $425 per share you can buy February $430 call options for $12.75 per share and sell February $440 options for $8.60 per share. For a net price of $4.15 per share you stand to capture $10 of value if Apple increases to $440 by February 18, which is only 3.5% above the current price. Further, when volatility falls post earnings it will fall both for the option you are long and the option you are short. All that really matters is that earnings move the stock up. As long as the stock reaches $434.15 (2.2% above the current price) you break even, from there to $440 is all profit. You can play around with the strike ranges to find something that maximizes your return based on your view of the potential move of the underlying stock post earnings.
Third, you could utilize a call spread similar to the construct articulated above but using April calls instead of February. This captures the January 24th earnings announcement, any potential iPad 3 announcements in February or March, and should also capture the April earnings announcement (note however that this the April earnings call date has yet to be set and similar to January options could expire before the call).
Disclosure: I am long AAPL.