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Profitable Apple Trades Despite Awful Earnings

At this juncture, if you're in that trade, you're watching that $570 level. While you could get put shares ahead of option expiration day, we'll just assume, for clarity purposes, that nothing happens until then. If AAPL closes above $570 at expiration, you made $995, minus commission, on the trade.

If that put closes in-the-money -- AAPL stock trades below $570 -- you will have to buy 100 shares of AAPL for every put sold. You are obligated to buy the shares for $570 apiece. That $9.95 premium you collected guards you against downside in the stock all the way to $560.05.

If you're bullish and, like most of the world, think AAPL will rebound in the next six to eight months, you probably consider $570 (at an effective purchase price of $560.05) a bargain. If you're hyper-bullish, that August $570 put brings in about $11.50 -- or $1150 per put -- as of Wednesday's close. (For more options trading ideas, check out a free 14-day trial of TheStreet's Options Profits premium service.)

Writing Covered Calls

In my July 18 article, I said:
For every 100 shares of AAPL you own, you could, for example, sell the August $650 call and, as of Tuesday's close, collect about $6.85 in premium income. That's $685 in your pocket no matter what happens to the stock. (Options use a multiplier of 100).
If that call trades in-the-money -- AAPL stock moves higher than $650 -- between now and option expiration day, you could have your shares called away.

I brought this trade up with some context: You're long AAPL and bullish, but some downside in response to earnings would not surprise you. Covered calls work well in a long-term bullish, but near-term bearish or only moderately bullish situation. In essence, the income you generate from the covered call helps you bide your time and feel a bit better about the position during times of weakness or stagnation.

Of course, anything could happen, but I feel relatively safe predicting that the August $650 call, now trading for about 40 cents, will expire worthless. There's no need to take your chances, however. It makes the most sense to buy the call back, close the trade and pocket about $645, based on the original premium collected of $6.85 minus the 40-cent buy back price, not including commission, for a roughly 94% profit.

And you still have your AAPL shares. If you expect further stagnation, why not pick your spot somewhere between the August $575 and $600 calls? They fetch between $11.80 and $3.55, as of Wednesday's close.

In any event, no matter what you think of Apple the company, AAPL the stock and the various shades of bullish or bearish sentiment towards both, you should always try to play it smart headed into an earnings report, particularly such an uncertain one. Basic options strategies, not directional bets akin to gambling, often make the most sense, particularly for long-term investors.

At the time of publication, the author did not hold a position in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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