5 Apple Options Trades As We Approach $500

Feb.13.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is going to hit $500. It's not a matter of if, but a matter of when. Some thought on Thursday that Apple would hit $500 because it just kept rising. If the markets hadn't dropped on Friday, Apple most likely would have hit $500. It didn't, but many would assume Apple is going to do it soon, perhaps next week.

Now, everyone knows that Apple has plenty of growth ahead of it, and that the company is firing on all cylinders right now. If you don't have a reason to buy the name, just take a look at my past couple of articles on the company. I'm sure you'll be convinced that this name needs to be in your portfolio.

Now, the focus of this article will be specific. It is devoted to option strategies on the name as we approach $500. Some of the strategies require you to own the stock, other's don't. I've mentioned put-selling in some of my previous Apple articles, and I will cover that in this article as well. For purposes of this article, I am not including the cost of any commissions. I am also not taking into account any margin requirements you may have while executing these strategies.

As always, I must remind you that option trading contains serious risks, and you should be comfortable with this high risk strategies. You may also want to consult with your broker to find out what the requirements are for using margin, including if you need to post any collateral when selling puts and calls. Now let's get into some strategies, with the rationale for each trade.

1. Getting long Apple here, but at a slightly cheaper price:

This is a traditional buy the stock with a covered call strategy. For instance, you buy 100 shares of Apple at $493.42, and sell a higher priced call. In this trade, I would sell an October expiration $580 call for $17.10.

This trade is simple. You participate in Apple's rally up to $580 through the middle of October. By selling this call, you receive $17.10 back, which lowers your cost basis on the shares (if you use an equal call to share ratio) to $476.32. That allows you to get Apple shares at a cheaper price than they are currently trading for.

How does the trade work? As long as the stock stays above $476.32, you make money. You make money all the way up to $580, where your profits are capped. Above $580, your shares would be called away. You can make almost $104 at the high point, which would be 22%.

2. I like Apple. I want it cheaper. I don't want to miss a pullback, but I'd like something while I wait.

This is the put-selling strategy I've discussed a couple of times in past Apple articles. In this strategy, you don't own the stock, but you need to have the money to buy the shares if the option gets called.

For this strategy, I'm using a sell of the July expiration $480 put. This gets you $30 per contract. If Apple stays above $480 all the way to July, you keep the $30. If Apple falls below $480 and the option is exercised, you are forced to buy the shares at $480. However, since you've collected the $30, you basically are buying shares for $450.

This strategy only loses you money if Apple falls below $450, which most people would think right now isn't going to happen unless we get a market crash. If the shares get called, you have to have the money to buy the stock, but if Apple only falls to say $475 and they are called there, you're up $25 a share. Not too shabby.

3. I want to get long Apple, with no cost.

Get long Apple for free? This sounds like it is too good to be true. It's not, to a point (remember margin requirements). This strategy allows for some nice profits, but if Apple rises too much, you can start to lose them, and you are opened up to losses.

For this strategy, I'm using May expiration options, which will get you through Apple's next earnings report. For this trade, you would buy X number of $490 calls, which currently would cost you $31.50. You would then sell 4X number of $560 calls, which currently would get you a little over $30. The math doesn't work out 100% at Friday's closing prices, but using limit orders you can make it work.

If Apple closes below $490 at expiration, all you lose is your commissions. If Apple closes above $490 by May expiration, you start to make money. Your profits are capped at $560, where you would make $7,000 per $490 call you bought. Above $560, the calls you sold starts to work against you. You would start to incur losses above $583.33, which would be a tremendous rally for Apple from here in just three plus months.

4. I don't think Apple is going to move that much over the next few months.

If you think Apple is going to trade in a narrow range, or just be a little choppy, but remain mostly flat from here, you could sell both call and put options.

For this trade, we'll use April expiration and a $495 strike. You would sell a call for $23.25, and sell a put for $24.70 (for this trade, same number of calls and puts). You receive $47.95 per contract of each. If Apple is exactly at $495 at expiration, you would pocket that nearly $48, assuming of course none of your options you held were exercised. As long as Apple stays in the range of $447.05 to $542.95, you make money. Again, this assumes none of the options you hold are exercised, in which you need to have the money ready for whatever side of the trade you have to cover.

5. I think Apple is going to make a huge move in the next few months, but I'm not sure in which direction.

For this trade, you can use the exact same setup above, $495 strike for April expiration. Under this scenario, however, you would buy an equal number of calls and puts. If Apple finishes outside of the above range, $447.05 to $542.95 by expiration, you make money. Otherwise, you lose money, up to $47.95 if Apple is at $495 at expiration.

These are just five strategies you could employ using options for Apple. There are plenty of others out there. Now, if you want to just be long or short Apple, that's fine. But there are those that like to trade options or use them to enhance a position, so one of these strategies may be for them. Again, options trading is risky, and I've ignored commissions and margin requirements for purposes of this exercise. If you are interested in one of the above mentioned strategies, know the risks involved and where your profits and losses are. These trades can make you some good money, but there is the potential for losses as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.