Apple: A Lesson in Trading Volatility

First, understand this: Like stock trading, when trading options, we essentially want to "buy low and sell high." Thus, with Apple's volatility levels soaring, we should look at selling opportunities rather than buying opportunities.

Let's start with Apple's call options:

Click here for larger image.

Source: Bloomberg

At these elevated levels of volatility, I would be a seller of Apple call options. According to the above Bloomberg screen, with 10 calendar days and just 8 trading days remaining to options expiration, it appears that prices and implied volatility for Apple calls are better sales than purchases.

If I owned Apple, I would be inclined to sell covered calls at strike prices ranging from 90 to 120. This would allow me to take in some option premium, which would create a hedge on my Apple position.

As the option seller, the worst case scenario is that Apple rises above the strike price at expiration and you lose your stock. Of course, you can always buy it back.

Here's a walkthrough of one scenario: Let's say I sold the Oct 110 calls for $2.45. If Apple remains below $110 at expiration, then I get to keep the $2.45. If Apple rises above $110 at expiration, then I will have to sell my Apple for $110 no matter where the stock may be trading at that time.

Now, here's a look at Apple's put options:

Click here for larger image.

Source: Bloomberg

Based on the above screen, I would be looking to sell put options "naked" at strike prices that have implied volatility at or above the 111% implied stock price volatility. This would be put options with a strike of 90 or lower.