It has been a heck of a ride for Apple (AAPL). The stock may be more and more subject to market direction now that it is the No. 3 company by market cap, but 52-week highs and all-time highs have almost become routine, and many analysts are calling for higher prices down the road.
After a weekend options review, something stood out that looked like a significant opportunity for options writers rather than just for options speculators. This may be a better strategy for those who are already long the stock and want to add to a position rather than just taking limitless risk. The good news is that the limitless risk with a market cap is probably not as limitless as it was a year or more ago.
Buying a straddle means that you are taking the volatility trade and you do not care if it goes up massively or down massively. It just has to go up or down more than what you paid for the call and put. Writing a straddle is quite different, although it can be hedged.
On Friday, with a $247.40 close, writing the May 2010 $250 straddle (selling the puts and calls) brought in more than $19.20 in combined premiums. So the writer is betting that shares won’t fall under $231 or rise above $269.
The trade has come in now because Apple shares are down over 2%, and the stock is trading around $242. Still, the closest put and call is now the $240 straddle. The call generates $11.50 in premium (of course, minus that $2 in premium that the stock is in the money) and $7.30 in premium for the $240 put. That still leaves $18.80 in combined premiums available before accounting for the $2.10 you would deduct in your exposure calculations for the intrinsic value in the call.
Apple historically sees profit taking, but the stock usually rises over the month after earnings. The recent change of accounting might not help matters, but this leaves almost 8% available for capture for those willing to write options. The stock started 2010 out close to $210 and went into the $190 handles in February. Friday’s high was over $251 before the Goldman Sachs news was out.
Any large price movements between now and Tuesday afternoon will certainly change option strategies based upon risk and reward. The good news is that writing the $250 straddle did not change enough to make writing the $240 straddle an unattractive strategy.
A hedge that would keep the losses from getting out of hand would be buying the AAPL May 220 Put and buying the AAPL May 270 Call.
Either way, the premiums here are enough at the closest strike prices that it seems being a seller of volatility offers better implied upside than buying the volatility trade.
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