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Monday, July 20, 2009

3 Apple Inc. (AAPL) Option Strategies to Capture Volatility from Earnings

Historically when Apple Inc. (AAPL) reports earnings it becomes rather volatile. The table below shows the earnings date followed by the next change on the following trading day, the change 1 week after the earnings date, and the change 2 weeks after the earnings date (all in %).

Apple Earnings Date Next Day 1 Week 2 Week
July 21, 2008 -2.6 -7.2 -7.9
October 21, 2008 5.9 9.2 21.3
January 21, 2009 6.7 13.7 12.9
April 22, 2009 3.4 2.9 9

These option strategies I am about to write about are all extremely dependent on volatility and direction. Remember the risks involved when purchasing both call and put options. To learn more about options click here or check out my option trading E-Books for easy to follow examples on how to open and close strangle and straddle option positions.

All data as of stock market close Monday July 20, 2009.

Apple Inc. Option Strategy #1 Option Straddle Strategy: Purchase both the Apple August 155 Call and Put option. To open this strategy it would cost $1410 per contract or $14.10 a share. In order to break even from this option straddle position, Apple needs to gain 10.57% or fall by 7.87% from current price by August options expiration. Everything above 169.10 a share, or below 140.90 a share is profit. A more bullish alternative would be straddling the August 150 call and put option [as of current closing price]. However the closer Apple trades to 155 or any given strike the more even the strategy becomes on each side.

Apple Inc. Option Strategy #2 Option Strangle Strategy: Purchase the Apple August 155 Call option, and 150 Put Option. To open this strategy it would cost $1160 per contract or 11.60 a share. In order to break even from this option strangle position, Apple needs to gain 8.93% or fall by 9.51%. Everything above 166.60 per share, or below 138.40 per share is profit. Note if Apple expires in between the 2 strike prices 100% of the position is lost.

Apple Inc. Option Strategy #3 Iron Condor Option Spread Strategy: Purchase both the August 155 Call and put option. And sell the August 175 Call option, and 135 Put option. To open this strategy it would cost $1145 per contract or $11.45 a share. In order to break even from this Iron Condor spread position, Apple needs to gain 8.7% or fall by 7.5% from current price by August options expiration. Everything above 166.45 a share until 175, or below 143.55 until 135 a share is profit. This is like the straddle, but costs less, the trade off is that it limits your upside (nothing above 175 a share results in a gain) and downside (nothing below 135 a share results in a gain). Like the straddle, a more bullish alternative would be using an Iron Condor around the August 150 call and put options. However the closer Apple trades to 155 or any given strike the more even the strategy becomes on each side.

As of market close Monday July 20, 2009, the current options market is factoring in slim probabilities for these strikes. The options market is factoring in a 13.6% probability Apple closes below 140 a share by August options expiration, and 18.7% probability Apple closes above 170 a share by August options expiration.

These are just some ideas of option strategies and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

To learn more about these option strategies, how options can help protect your portfolio, and allow you to speculate with less money up front click
here.

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