Profitable Apple Trades Despite Awful Earnings

NEW YORK ( TheStreet) -- I take a lot of junk from Apple ( AAPL) bulls. Quite a few send correspondence, often via Twitter, accusing me of having an "anti-Apple agenda."

Of course, I sit around my apartment scheming up ways to talk Apple down. I do this while listening to music on my iPod Shuffle, playing Angry Birds on my iPod Touch and surfing the Mac Web site on my iPad to price out different configurations for the MacBook Pro with a Retina Display I intend to buy next month. (That's a true picture of my Tuesday evening).

Because I hate Apple.

Actually, I love Apple, but I do not allow that fact to cloud my judgment with regards to the trajectory of the company or the stock. When you fall too deeply in love, it's easy to put on the blinders and move lock step with nothing but a rose-colored outlook. That's what many AAPL bulls have done on two critical fronts:
  • For several months, they have discounted the impact of Steve Jobs's absence on the current and future operations of the company; and
  • After Tuesday's earnings miss, they accepted uncritically the view that iPhone 5 will right Apple's near-term woes in the quarter including the holiday-shopping season.

I expand on each of these points in my post-earnings rehash: Apple Stock is Dead; Sell It on a Bounce.

In this article, however, I focus on AAPL trades that I highlighted prior to earnings that actually would have made investors money or cost them less than a straight, bullish directional bet.

First, on July 16, I sounded a cautious tone ahead of earnings. I followed that story up with two articles that offered potential ways to trade the report: Will Apple Miss Earnings Estimates? on July 17 and Don't Sell Apple, Intel, Chipotle and IBM on Earnings, Do This Instead on July 18.

Selling Puts

In the July 17 article, I provided the following rationale in support of a put-option selling strategy:
In this environment, cautious AAPL bulls might consider using options to approach the stock ahead of a relatively uncertain quarterly report. While another blowout or even record quarter would not surprise me, there's no question that investors should, at the very least, pause ahead of that thought. No clear catalyst exists to drive such powerful numbers from Apple this time around.

I determined that it might make sense for the bullish, but cautious AAPL shareholder (or non-shareholder, for that matter) to sell a put ahead of earnings. You make this trade for several reasons, namely:
  • To generate immediate income
  • To set yourself up to potentially get long on a pullback

I suggested considering the sale of the AAPL August $570 put. At the time of publication, you would have collected about $9.95 per share -- or since options use a multiplier of 100, you would have made premium income of $995 for every put sold. (For the record, I never use or advocate naked puts, rather I prefer cash-secured puts.)

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.