Potential Apple Trades Ahead Of Earnings

| About: Apple Inc. (AAPL)

Apple (AAPL) releases earnings on April 24th. This quarter's report comes after this month's options expiration day, which takes some of the complexity out of swinging AAPL-related trades around a potentially volatile time. If you're long and not looking to compliment your position with options, your biggest worry is ensuring you have the latest version of QuickTime downloaded so you can listen to the post-release conference call. As all of the cool cats say on Twitter - #firstworldproblem.

While some AAPL longs will sit back, relax and listen to the two-part harmony of Tim Cook and Peter Oppenheimer with merely a stock position in tow, others will look to put on some sort of options trade.

In this article, I consider basic covered call and cash-secured put strategies that anticipate positive results.

Quick note - I am viewing quotes from over the weekend. With no trading on the Good Friday holiday, expect meaningfully lower premiums on Monday morning. In any event, I still believe these trades, even if you collect a bit less income than noted, make sense for the long-term investor holding several hundred AAPL shares.

I would forget about April and target May options. If you intend to hold your shares no matter what happens on the 24th, imagine where you think AAPL could realistically trade in mid-May on a powerful report.

Consider $700. That's another key psychological level after $650. If AAPL soars to $700, it will have appreciated roughly 10.4%. As I was hunting Easter eggs, the AAPL May $700 call sported a bid price of $9.30. For each call you write, you collect $930 and keep that income no matter what happens to AAPL stock. On 500 shares, that's $4,650. Let's consider what this does to your return, using four different cost bases and a sale price at the $700 strike with and without the $4,650 worth of covered call income.

Cost Basis Sale Price Gain, Stock Only Gain w/ Covered Call
$300 $700 133% 136.4%
$400 $700 75% 77.3%
$500 $700 40% 41.9%
$600 $700 16.7% 18.2%

Clearly, the covered call income does very little to boost your return. It does, however, address other situations.

First off, it protects you, to a certain extent, from the AAPL investor's greatest fear - leaving money on the table if the stock continues to run after you sell. In this scenario, you do not leave money on the table, assuming you had your shares called away at $700, until AAPL trades above $709.30. That's about an 11.9% increase in AAPL between the holiday weekend and May's options expiration day.

If you do not get your shares called away (or even if you do), you could use that $4,650 worth of income to do several things. Of course, you could reinvest it in AAPL or something else. You could also make a habit of writing AAPL covered calls and use that money to either live on (for many of us) or to help support a loftier lifestyle. When you consider $4,650 taking a return from 75% to 77.3%, it does not sound all that impressive. When you think of it as covering your room and board for a month, it takes on a more attractive luster.

But, what if you do get your shares called away? Presumably, you'll have enough money in your account to buy them back. Instead of doing that outright, you could write ITM, ATM or OTM AAPL June puts (depending on where you think the stock will move between mid-May and mid-June) in an attempt to reacquire 500 shares of AAPL.

While the June premiums will come in at different prices for a variety of reasons, including upside or downside in AAPL, consider the following. Over the weekend, the AAPL May $635 put fetched $31.25. If you write five puts at that level, you produce $15,625 worth of income in your account.

There might not be a better deal in the market, on many stocks, not just AAPL, than entering the income-generating cycle of selling covered calls and, if you get your shares called away, turning around and writing cash-secured puts.

If nothing else, the strategy is something for AAPL investors sitting on unrealized gains to consider as earnings approach.

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