Apple: Playing The News

| About: Apple Inc. (AAPL)

By John J. Critchley, Jr.

The steamroller continues. Apple (NASDAQ:AAPL) trades north of $677 a share, a gain of +$13.75 or nearly 2.1%. The tech giant is making new highs today as it receives a favorable ruling in a patent battle with Samsung (OTC:SSNLF). Investors are reacting to the ruling by a jury this past Friday that Samsung Electronics infringed on six patents held by Apple with Samsung's smartphones and tablet computers. The ruling states that Samsung must pay Apple at least $1 billion in damages, with the possibility of more penalties and an injunctive restriction against the sale of some Samsung devices. (Source here)

Also adding fuel to this blazing fire is the widely expected introduction of the much anticipated iPhone 5 on September 12, 2012. It is not uncommon for Apple to trade higher into a major product launch, but the run-up in Apple leading up to this announcement has been impressive. The speculation, since debunked by leading bloggers, that the mini iPad will also be announced on the same day has certainly added to the upside trajectory. (Source Here)

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Source: Livevol Pro (

With this mania in the underlying and stratospheric expectations, come opportunities in the options marketplace. The implied volatilities of Apple options have risen from a six month low of 20.02% hit on August 10, 2012, to a current reading of 26.80%. This dramatic rise is quite noteworthy as it has occurred in the face of a long holiday Labor Day weekend.

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Source: Livevol Pro (

There may be an opportunity to take advantage of these elevated implied to initiate option positions that nicely fit into your view of the fundamental of AAPL.

There are two logical ways to take advantage of these elevated implied volatility levels in AAPL depending on your underlying bias:

1) Initiate a brand new short position

2) Take a bullish stand.

Let's look at one for the bulls and one for the bears.

Trade idea#1 -A Bullish Options Play

To find the most attractive near term bullish options play, one must has to look no further then the September 2012 monthly options, which presents compelling near term value. By trading the September monthly options, we hope to capture any continued upside momentum ahead of the announcement.

This is not a specific trade recommendation, but a trade analysis.

The play: To take advantage of abnormally inverted upside implied volatility skew and to benefit from any further appreciation in Apple.

a) Buy September 2012 monthly 700 calls for $9.90. Buying Implied Volatility of 26.23%.

b) Let's sell the September 2012 monthly 730 calls for $3.60. Selling Implied Volatility of 26.61%.

Net debit: $6.30

Why these strikes?

Due to the recent rally in the underlying, the upside call options are quite bid. By buying the September 2012 monthly 700 calls at a 26.23% IV, you are receiving a .38% premium to the sale of the September 2012 monthly 730 calls. The skew in Apple call options has inverted. This is quite unusual. Normally, one would see the 700 strike calls trade at a implied volatility premium to the further Out-of-the- Money (OTM) 730 call strikes. In this case, the opposite has occurred. Let's take advantage of this anomaly.

Risk: You will lose the entire premium of $6.30 if Apple does not close over $700 by September 2012 monthly expiration.

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Trade idea #2 -A Bearish Options Play

Are you skeptical of this recent move in Apple and believe in the old traders adage of "Buy the rumor, sell the news?" If the answer is "yes," let's look at a bearish play in Apple options. To find an enticing near term implied volatility option play, one must has to look no further then the September 2012 monthly options.

This is not a specific trade recommendation, but a trade analysis.

The play: To take advantage of abnormally low downside implied volatility skew and to benefit from any post-announcement sell-off in Apple.

b) Buy September 2012 monthly 650-630 put spread for $ 4.25. Receiving about 1.3% in Implied Volatility skew (buying 26.84 IV vs. selling 28.14 IV)

To finance this spread:

b) Let's sell the September 2012 monthly 725 calls for $4.15 This is approximately a 26.58% Implied Volatility.

Net debit: $.10

Why sell the September 2012 monthly 725 calls? There are two reasons:

1) There is much excitement and mania over the upcoming Apple product announcements and much bullish sentiment in the marketplace. This is the main contributing factor that is leading to the fact that the upside call options are still quite bid. By selling the September 2012 monthly 725 calls at 26.58% IV, you are only "giving" up a .26% discount to the September 2012 monthly 650 puts. This difference is nominal. Normally, one would see a more pronounced skew (difference) between the OTM (out-of-the-money) puts and calls. Let's take advantage of this anomaly.

2) If your bearish view is incorrect, you still may be able to get away with being short some upside calls as you only begin to lose money if AAPL rallies nearly 7.2% between now and September 2012 expiration.

Risk: You will be short the stock over $725. A 7.2 % upward move in AAPL over the next month.

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Stay tuned

Notes: Prices quoted where the prices at time of submission and do not reflect current market prices. You are solely responsible for your own trading and investments decisions and the ideas presented in this article are trade analysis, for educational purposes only and do not constitute buy/hold/sell recommendations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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