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How to Play a Plunge


Most people freeze up when a stock they like gets crushed on the opening. They often lack the courage to take a position until they see how the stock settles out. Once that happens you can feel surer that you are not "catching a falling knife."

If all you are seeking is a decent return on investment, waiting can mean missing the best time to trade. That's especially true if you are option savvy. Option premiums are highest when volatility spikes. Buying shares while simultaneously selling both call and put options can establish a wide band of profitability.

This is a powerful technique if you are convinced "the damage has already been done." Apple's (AAPL - Get Report) gap down provided a great opportunity to profit from the drop that took place after their latest earnings report.

At 11:37 a.m., the shares were quoted at $508.60 with about $37 available for sellers of a July 19, 2014, $500 call and a premium of $32.60 for writing the same expiration's $500 put.

Must Read: Notable Two Hundred Day Moving Average Cross - HGR

Here's the simple math on the buy-write combination for the five and a half month period until expiration.

Owners of Apple shares will earn at least one $3.05 quarterly dividend (goes ex Feb. 6) and perhaps two if the July $500 call is not exercised early. The numbers below conservatively reflect only one payment.

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