Apple (NASDAQ: AAPL) stock traded down Friday as traders continued to feel the impact of the rebalancing of the Nasdaq 100 (NASDAQ: QQQ), and the competitive impact of Research In Motion�s (NASDAQ: RIMM) new Playbook tablet. The initial reviews are in and they have been unfavorable for RIMM.
Options trading investors should take advantage of the unfounded short-term Apple selling ahead of earnings, scheduled for release on Wednesday, April 20. The stock has historically breezed past earnings estimates and this time should be no different. Apple is down approximately 6% the past few weeks and strong earnings should reverse the trend. With a �true cash� adjusted P/E of 16 I believe that Apple is a bargain, as reflected in option values.
With this information, executing a buy-write on AAPL Apr 21 325 Calls is the best strategy due to the risk-return profile. If you are uncomfortable with this level of risk, I suggest utilizing the 330s. Conversely, to increase potential returns the 335s may be a better choice for your individual strategy. An alternative strategy is to sell out-of-the-money puts and collect the premium without having to purchase the stock outright; the 320s, 325s, and 330s are attractive for this purpose. Think about it: would you be willing to receive $5 to potentially be forced to buy Apple at $320? Note that if the stock declines to the strike price, you are obligated to buy the stock (or closeout the position).
For more depth, please consult a detailed option chain. To read my full analysis, please continue here.
Disclosure: Paul Zimbardo is long AAPL.
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