ByJames Maxwell:Apple Inc. ( AAPL ) will announce
it's third quarter earnings on Tuesday, July 24th. The fundamentals
and growth of the company should inevitably lead to higher share
prices in the future. In Apple's second quarter the company earned
$11.6 billion in profit on revenue of $39.2 billion while expanding
cash reserves to over $100/share.
Click to enlarge.
Apple July 24th earning report
How to profit: Sell AAPL Aug 18 525 put
My options strategy for Apple's earnings report after the bell
Tuesday, July 24th is to sell AAPL Aug18 $525 put for $2.43. The
strategy is a winner if AAPL goes up, stays flat, or goes down
slightly. It loses only if the share price finishes under $522.57
on Aug 18, 2012, a 13+% decline in under a month.
Why $525? Why Aug 18?
I feel that this is a comfortable safety margin for the stock
and believe it is very unlikely AAPL will make a $80+ downward move
in 27 days. With 27 days to expiration, at this strike price, time
decay will quickly lower this option value. $500 is too far away to
use maximum advantage of time decay and $550 is too close for
comfort.
In making this trade I will collect $243 for selling one put
contract. To sell this put I'm required to put up $5,480 per
contract as a maintenance requirement with my broker. Assuming AAPL
is trading around $605-$610 at earnings, my safety margin for this
trade
is 605-525= $80 move in apple share price.
My hope with this trade is that AAPL will go up after earnings.
If it does, the value of the put option I sold will fall quickly to
almost nothing. Since I already sold that put, I'll be able to buy
it back very cheaply (cover it), keeping the remainder as profit.
This scenario would profit about 80-90% on the put by Wednesday
morning.
If Apple remains flat after earnings, I'll profit as well. The
upcoming earnings report has elevated options prices. If apple
comes through earnings and remains near flat, the put options will
quickly fall. At this point, I will cover and take a quick
profit.
The Bottom Line
This is a relatively conservative strategy. You stand to collect
$243 up front per contract (broker maintenance requirements may
vary). You profit quickly on this trade after earnings if AAPL goes
up, stays flat, or even falls slightly. It is always easier to
predict where a stock won't be than where it will be. I will
explore this topic in detail in further articles. I am also
planning an after AAPL earnings follow-up article.
Disclosure: I am long [[AAPL]]. I am short AAPL
Aug 18 puts.
See also Sonic Automotive's Management Discusses Q2 2012
Results - Earnings Call Transcript on seekingalpha.com