Everyone wants to opine about Apple (AAPL) and the new iPad tablet device, yet investors and traders appear to have mixed feelings about just how they want to play this.

Apple’s stock price gyrated yesterday with a huge sell-the-news reaction on the announcement sending the stock from $205 to $201. But then shares shot up when Steve Jobs showed a $499 price tag along with the glass-breaking sound. The crowd cheered and the stock rallied from $201 back up to $210 before it settled again. 

Day traders love this sort of volatility because they can chase a stock up and chase it down every minute of the day. But this drives everyday investors bonkers because the volatility often shakes them or their stop-losses are triggered.

That being said, maybe a volatility trade is in order with options on a deleveraged basis … this is the straddle trade.

Be advised that this is mere a snapshot and is geared more toward individual investors rather than meant for institutional traders and investors. This does not go into implied volatility, does not take the option Greeks into consideration, and is solely intended as a deleveraged trade set-up.

Wednesday’s volatility was large with a price range of $199.53 to $210.58. But Tuesday’s volatility was effectively the same as the high was $213.71 and the low was $202.58.

Right before 11 a.m. Eastern, we saw Apple shares down 3.8% and shares are right at the $200 mark. Then throw in the key moving averages used by traders: the 5-day at $202.91, the 10-day at $206.47, the 20-day at $208.87, and the 50-day at $203.34.

You have already seen an $11 range yesterday and you have an obvious battleground in the stock as the shorter-term moving averages for traders are all above the current $200 price. Then, on the support side of the equation on, a longer-term basis $190 was support in December and $187 was in November. In short, Apple trades all over.

Thomson Reuters has a price target of $245 to $250 depending on whether you use the mean price target or the median price target. 

So back to that volatility trade. Many investors avoid Apple because they feel it could drop after the huge run it has had and it is now one of the largest companies in America by market cap. But everyone wants a piece of the Apple trade as well.  Jim Cramer has even thrown a $300 price target out there.

So what should you do?

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Trade Apple (AAPL) Volatility With a Straddle

The volatility trade is most simply a pure straddle trade, where an investor buys both the put and call. This way you don’t have to care if Apple goes down to $190 or goes above $210 … it just has to go somewhere. 

All options expire worthless if they are out of the money, so in an instance where you want a deleveraged trade where it is one contract per 100 shares for Apple exposure that you would have bought or sold short.

Does it seem feasible that Apple would be more than $10 higher or lower a month out? You have already seen that sort of move in the last two days. What about $20 higher or lower two months out?

The AAPL Feb 200 Calls were $7 and the AAPL Feb 200 Puts were $6.65 per contract. You add the price together for $13.65, and then using your breakeven price from $200 means that Apple has to go above $213.65 or below $186.35 for your straddle to be in the money. At this level, you are taking an implied downside risk of less than 7% on a deleveraged basis.

Is three weeks too short a time frame with these options expiring on Feb. 19?

Well, the March 200 strike that expires on March 19 costs $10.55 for the calls and $10.25 for the puts. Add those two together for $20.80, and Apple has to go above $220.80 or below $179.20 before March 19 for the trade to be profitable.

If you are deleveraged and wanted to use this strategy, you are taking just over 10% implied maximum downside.

It is likely that we will have a real feel for how successful the iPad will be for delivery dates and demand in the next two months. If the tablet is a huge success, many will be bullish despite the run up and high market cap. If problems arise, though, then it is easy to say that Apple will be thought of fighting too many wars on too many fronts.  

The farther out you make your volatility bet, the more expensive the trade. That is always the case in options.

Of course, this “implied downside” refers to using options rather than putting down $200 per share. You know by now that options are 100% risk-based capital and that they all expire worthless if they are out of the money. If you want the chicken-bull trade, then just buy the stock and hedge it with the put option. The chicken short-sell is the short sale and hedging it by buying a call option.  

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