A Calendar Spread Strategy To Capitalize On Apple's Expected Announcement Next Wednesday

| About: Apple Inc. (AAPL)

Next Wednesday, September 12, 2012 is the day when the big (iPhone 5) announcement from Apple (NASDAQ:AAPL) is expected. It will be interesting to see how the new bells and whistles will be viewed by the market. There seems to be universal agreement that many millions of the new phone will be sold. It is just a question of how many millions that might be.

Of equal (or maybe even greater) importance will be whether a deal with China Mobile is also announced. If it is, great things could be in store for the stock. Forbes Magazine published an article speculating that a China Mobile-Apple agreement would result in an $800 price for AAPL, for example.

So how can you play the expected announcement(s)? My favorite method is to use calendar spreads at several different strike prices, some below and most above the stock price. Since I am bullish on AAPL, I would place a much greater number of spreads at higher strike prices, especially going into what could be a gangbuster week for the company.

In an earlier Seeking Alpha article entitled, "2 Strategies For Making Extraordinary Returns With Apple Options", I discussed an actual portfolio that I was running at Terry's Tips, which had gone up in value by 357% while the stock rose only 13.3% over a four-week period.

The four weeks has now extended another two weeks, and the portfolio has now gained 526% after commissions, while AAPL has gone up 16.3%.

Today, I would like to share with you the exact AAPL positions that are in this portfolio, and what the risk profile graph looks like for next week's important developments, just in case you might like to mirror them in your own account. The portfolio value is currently $9,009, although $1,304 is in cash, so the options listed below have a value of $8,605 (we are holding the cash aside in case there is a big move in the stock on Monday or Tuesday, and we might want to add new spreads to increase our break-even range in one direction or the other).

These are the actual positions in the portfolio at the close on Friday when AAPL closed at $680.44:

(click images to enlarge)

While this list is a little ragged to understand, it contains long calls in the September and October monthly series and is short Weeklies that expire next Friday, September 14. These are the spreads we own:

Strike Price # Calendar Spreads

675 1

680 1

685 2

690 1

695 3

700 3

Usually, we have about the same number of calendar spreads at each strike price, but since we believe that there is a better-than-even chance of a big up-swing next week, we have extra spreads at the 695 and 700 strikes.

According to the risk profile graph generated at thinkorswim, here is what we can expect the portfolio to look like at the close of business next Friday (assuming no adjustments are made):

The P/L Day numbers on the lower right-hand corner show the expected gain if the stock ends up at the price indicated on the lower left-hand column. If the stock remains absolutely flat at $680.44, a gain of $3,258 is expected, or about 37% for the week. That sure bets buying an at-the-money call (in my book, at least), which would lose you 100% of your investment if the stock doesn't move. In fact, any call that you might buy, in or out of the money, would lose money if the stock remained flat.

The graph shows that if the stock were to move $10 higher, the gain should be about $4,900, or 57% of the amount at risk. Of course, we are betting that the stock will trade higher next week, so that would be fine. It could go up another $10, and we will still make more than 50% for the week. We only start losing money if the stock moves higher than $710 (unfortunately, a distinct possibility). There is a good chance that I might buy back some or all of the weekly 700 short calls on Monday or Tuesday to give us more profit potential on the upside (and give up some of the gains that would otherwise be made at lower prices).

On the downside, if the stock were to fall by $10, we would expect to make a small gain, about $360 (still a lot better outcome than the purchase of any call would enjoy). Of course, if the stock falls more than $11, we encounter a losing situation. A calendar spread strategy can give you protection for moderate stock price moves in both directions, but unfortunately, there is no such thing as perfect protection in both directions.

If someone were not as bullish on AAPL as we are, they would place more spreads at lower strike prices and the entire risk profile graph curve would shift to the right, allowing for a much larger price drop before a loss situation was encountered (and lower gains if the stock were to move up).

The software that thinkorswim uses for this graph assumes that the implied volatilities (IV) of the long options will remain the same once the weeklies expire next Friday. Actually, once Apple's announcement comes out on Wednesday, much of the uncertainty will be gone, and IV is likely to fall for the September and October calls. This means that the projected gains could be quite a bit less. Of course, IV may not necessarily fall, but I didn't want anyone to be disappointed if they put these positions on and these exact returns did not come their way.

My wife and I are off tomorrow for two weeks of hiking in the Cotswolds and coastal paths of England, but every day at 3:30 p.m. local time, I will get on the wireless connection to watch my AAPL calendar spreads do their thing as we await Apple's important announcement(s). I may be a little slow in answering comments to this article. I hope your will understand.

I sure am hoping that one of those announcements includes China Mobile, the largest (by far) mobile device company in the world. That should really give AAPL stock a big boost, as if just the idea of the iPhone 5 has not boosted it hugely already.

Disclosure: I am long AAPL. 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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