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With the approximate $100 per share pullback in Apple Inc (AAPL) shares, I decided to examine the company to determine if an opportunity exists for some speculative profits. The article will revolve around using options to establish a position in the shares, while limiting the amount of capital allocated to the trade.

AAPL has traded down sharply over the course of the last month. The company released earnings that were met with apparent disapproval as the shares sold off, providing us with the current opportunity. As we can see from the chart above, AAPL is at a crossroads: is the recent selling a sign of things to come or is this an opportunity for investors to get in before the shares make a run to new highs.

The selloff was sparked by a compression in the gross margins achieved by the company. As we can see from the charts below, margins have contracted recently however they are still comfortably above their 5 year average. Next quarter will encompass the Christmas selling season where I have no doubt that AAPL's wares will sell quite briskly.

(click to enlarge)

AAPL Gross Profit Margin Quarterly data by YCharts

The bears will make the case that the gross margin compression will continue as new competitors enter the market with equivalent or superior products. This will prevent AAPL from being able to charge a premium for their products instead they will be forced to price their wares in line with their competitors. There is some validity to this line of thinking. If we look at the PC segment of AAPL business they are averaging a 20% gross margin which is a far cry from the margins achieved by the I Phone. There was a time (think mid to late 90's) where PC's were the must have product with very attractive margins. As time went on, technology evolved and now the PC makers are barely profitable. The same fate will befall smart phones as they will become commodities, although I believe this will happen towards the end of this decade.

The answer to which side (bull or bear) is correct will be unveiled in January when earnings are reported. For this article I will include a trade to capitalize on the bullish case and one to capitalize on the bearish case. Both trades will incorporate buying an option to alleviate the need to commit significant capital.

For the bullish case I find the February 2013 585 call currently quoted at 52.95 on the ask, to be appealing. The 585 strike was used for it is just below the 200 day moving average as seen from this chart. The 200 day moving average combined with an oversold reading should serve as nice area for the bulls to defend. If the bullish case is indeed confirmed by the next earnings report, a run to new highs seems possible. The risk to this particular trade is the bearish case may be proven correct and the shares sell off considerably potentially netting the speculator a complete loss on the position.

As for the bearish trade, I believe a bit of patience is required here. The shares are a bit oversold here and could bounce which would inflict significant pain on a short position. If the shares make a bounce here into the 625-640 range, I would then be more comfortable in taking a short position. I would look to enter into the Feb 2013 630 put, but only after a bounce into the above mentioned levels. The option premium will be far cheaper, thus requiring less capital. The risk to this particular trade is AAPL earnings come in better than expected and the position becomes worthless.

Option trading is an excellent way to profit from the underlying securities move without tying up significant capital. The call or put trades that were described above are aggressive plays that could end up being total losses. They should be viewed as speculations and treated as such. Thank you for reading and I look forward to your comments.

Source: Using Options To Speculate On Apple

Additional disclosure: I have exposure to Apple via index funds. I may enter into one of the trades at some point in the future.