Friday, April 20, 2012

The Case for Selling Apple Puts

Lately it seems as if everyone with a keyboard is aflutter about the two weeks of selling in Apple (AAPL). I was about to label this a correction, but really, which is more correct: AAPL at 644 or AAPL at 582? How about the Topeka Capital Markets analyst that put a 1001 price target on the stock?

With earnings due out on Tuesday, there are rumors circulating about possible revenue beats and misses, what may emerge from the product pipeline when, etc.

There are a lot of investors out there that would like to own AAPL or add to an existing position. Many of those see the stock as an excellent value at 582, but are worried about the possibility of a negative earnings surprise, so they are not sure what to do.

Yesterday I tweeted the following trade idea:

“Simple idea: pick a price at which you would like to own $AAPL and sell the puts”

“$AAPL May 520 puts at 7.25. Think of it as being paid 7.25 to see if you can get the stock at a $70 discount”

One of the reasons I love options is that they allow for so much trading flexibility. Jared Woodard of Condor Options likes to say that options allow for a more nuanced language with which to express an idea about the markets. Rather than having the debate be about whether AAPL is a buy at 582, a better question might be, “What sort of ‘stink bid’ do I think might reasonably get filled in AAPL and how much can I get paid for making that bid?”

Looking at the AAPL options graphic below, the May 550 puts (right column) are currently available for 15.10, so if the short put expires in the money, the net cost for these shares will be 535. The May 520 puts referenced yesterday are still available for 7.25, which translates into a cost basis of about 513. It is even possible to sell the May 500 puts for about 4.30, which would mean a cost basis of about 496.

So if you really want to own AAPL and don’t want all of the risk associated with next week’s earnings announcement, consider selling some out-of-the-money puts. You can collect some premium for those puts and if that worst case scenario comes true, you can also lock in the stock at a nice discount to today’s price.

Finally, for those who may be interested in following me on Twitter, you can find @VIXandMore at

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