Two quick options plays on Apple earnings

Today, tech darling Apple reports its quarterly earnings. The company has traditionally pre-guided conservatively which has, at least in the past, had the effect of boosting share price after “better-than-expected” earnings were announced. But the bloom may be off the Apple blossom as the problems of the iPhone 4 combined with growing investor disinterest have contributed to its rangebound stock chart.

A CNBC guest (last name Price) and Apple analyst, on earlier during their Strategy Session segment, said that despite the fact that Apple has grown 5000%, he says he’s looking for it to expand another 4000%. He attributes the estimated growth to the exploding growth in broad-band products and applications.

So, even though you might be bullish on Apple in the long-term, today may be a very good day to pick up some shares at a very good price. If nothing else, you’ll be able to pocket some quick dough.

Two options strategies

There are two options strategies that must be put on before the market closes. (Yesterday would have been a better time to do this, unfortunately.) The first one is writing (selling) put options. If you want to own the stock at a reduced price and you have a lot of cash sitting in your account, this is the one for you.

As you can see from its chart at the bottom, Apple has strong support at the 10’s levels, meaning 240, 230, 220, etc. If you think that this time may be different and the shares go down instead of up after earnings, you can write any of the puts at the above given levels, depending on your outlook and risk tolerance. Note that July options expire this Friday*, so your downside time risk is very limited. Here’s the current bid/ask prices for the near-the-money July puts:

Apple Stock - July near the money puts

Should the stock dip to your selected strike price, the stock will be “put” to you, meaning that you’ll have to buy it at the strike price. For example, if you sell one contract at the July 230 strike and the stock trades at or below $230 before expiration, you’ll be required to buy 100 shares of the stock (because that is what one options contract represents) at $230 a share for a total of $23,000. You’d better have that amount in your account!

The upside to this strategy is that if you do get the stock put to you, you’ll actually be getting it at less than the strike price by the amount that you took in from the original sale. For example, if the stock happens to drop below $230, you’d be paying $230 less the $1.35 (say) that you took in on the sale, leaving you with a final cost per share of $228.65.

If you don’t care to buy the stock but want to pocket some change, consider writing a put credit spread. This is basically a bullish bet meaning that you don’t expect the stock to drop after its earning announcement. In this scenario, you would sell the higher strike put and buy an equal number of lower strike puts. For example, the July 230/July 220 spread would net you roughly 80 cents. You’d get to keep the money should the stock stay above $230 but you’d begin to lose it after the stock dropped below $229.20 ($230 – $0.80). The maximum you could lose would be $9.20 since the 220 put would start going into the money once the stock traded below its 220 strike.

I wanted to get this blog out yesterday where one could have pocketed a lot more money, but life got in the way. The point is that you can execute this strategy on other stocks that you wouldn’t mind owning.  Please do not try this or any other options strategy until you understand it and have paper traded it. Dr. Kris is wagging her finger at you!

*7/26/10 Note:  The July options had already expired at the time of this writing (sorry, my mistake!). The listed options are the WEEKLY options which are actually better candidates for options writing strategies as the time risk is reduced.

Apple Chart 7-20-10

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