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A Fabulously Profitable Apple Call Strategy For A Falling Stock Price

|Includes:Apple Inc. (AAPL)

In this article I will explain how I plan to earn $100,000+ in 2013 in my IRA while risking no more than $30,000.00. With Apple trading at $450, it would take $45,000 to purchase just 100 shares of stock, and $450,000 to control 1000 shares of stock. Using the following OPTION strategy I will show how I plan to control as much as 1000 shares of Apple worth $450,000 with only $30,000 or less at risk. The trade is leveraged at a ratio of up to 15 to 1.

I will be buying January 2014 Apple calls that are $40 out of the money at a cost of nearly $3,000 each. This allows for the purchase of 10 calls when employing $30,000. Apple options are about the most liquid stock options on the planet and buying a year out will allow the price to find a bottom and have plenty of time left for bullish surprises from earnings announcements, new product launches, dividend increases, etc. Since it will take a $40 rally to get to the strike price and an additional $30 to cover the option purchases, a $70 pop is needed to get the options profitable at expiration. But in a whole year, $70 is nothing! The stock dropped from $514 to $440 ($74) in just two days following earnings. It can pop back up about as easy as it went down. Since I have about 50 weeks to expiration of the options and I need a $70 rally to cover all my costs at expiration, then slippage (time decay) would be less than $1.50 per week.

To increase my chances of success, I will scale into the trade (scale trade) by buying one option on every $10 dip of the stock price. Starting at $450, I would buy a January 490 call, and then at $440 I would buy a January 480 strike call and so on. By the time the Apple stock price fell to $360, then I would exhaust my entire $30,000 but I would own 10 Apple call options and control 1000 shares of stock once the options were "in the money". My ten calls would have strikes that ranged from 490 down to 400, so the average strike would be 445. Above the price of $445 then I would earn $1,000 for every dollar Apple stock went up. At expiration, I would need a further $30 rally in the stock price to cover what I paid for the options, so if Apple was at $475 at expiration in January 2014, then I would be at breakeven. But that is after a year. If after 6 months I wanted out of the trade at breakeven then I would only need for Apple to trade at $435 thanks to the time premium that the options would still hold.

In 2012, Apple had a high to low trading range of about $267. If Apple in 2013 had a trading range of just $215, then if the stock price low was $360 then the high of the year would be $575. At the price of $575 the option position could be liquidated at a net profit of $100,000. Not a bad return on $30,000 in an IRA.

But of course that was the description of a perfect scenario. If the low of the year is higher than $360, then I will not get all ten of my options purchased $10 strikes apart. However, if the stock retests the lows several times and the bottom holds, then I maybe would go "all in" on the remaining options to average the breakeven price down, or just invest the cash elsewhere. Another thing that could happen (highly unlikely but still a possibility), the stock could go down to the lows and never rally back to breakeven the rest of the year. If that occurs then part or all of the investment would be lost. However, if that would occur then I would just do the exact same strategy in 2014, buying option strikes maybe $5 apart and surely sometime in 2014 Apple makes a nice rally that takes the stock all the way to $600 or higher and both year's investments are recouped, along with a profit of maybe $100,000, $200,000 or more. If Apple was a total dud in 2014, I could do this strategy again in 2015 and sometime we get a rally of $100 above my breakeven to let me become an overall winner. It just takes persistence.

Over the next couple years Apple will be adding a billion dollars about every week to its coffers so at some point in the next 2-3 years won't it at least double if not triple the price it is now trading at?!

I am an excellent swing trader and I believe with this much leverage, I could swing $100,000 profit for the year if the stock did nothing but go sideways. I believe I could breakeven if the Apple stock price continued to drop. I would just take partial profits on rallies, and buy back calls on dips. I will update my progress on a quarterly basis so readers can see how well I progressed with this strategy.

In closing, I am a professional day trader who normally only sells option premium and never buys calls; I only go short calls. However, I believe the sentiment is so unjustifiably negative on this company after it reported earnings that other companies would die for, that at some point sentiment improvement alone could bring me my profit goal. If Apple sentiment just went from negative to neutral, wouldn't it trade $100 higher than today? If sentiment ever turned bullish, would it not be worth a $200 pop from current levels just on improving sentiment alone? Netflix rallied 70% post earnings because the company earned $7 million in an entire quarter. Apple earned $7 million every 70 minutes in order to reach the $13 billion profit they reported! Thus, I don't believe this stock can stay under $450 long-term and under $400 even short-term. Apple call options are so cheap that they are screaming to be bought! Can you hear them?

Disclosure: I am long AAPL.

Additional disclosure: I will be implementing this call strategy in the near future.

Stocks: AAPL