Apple Straddle is no Strudel

In the face of mixed news, Apple (NASDAQ: AAPL ) hit a one-month low thereby
fully erasing the recovery after its April earnings. The past two weeks has
included considerable speculation of new iPad competitors which may have
frightened investors even though Apple has numerous positive catalysts, notably
iCloud and iPhone 5. Apple currently has a near insurmountable lead in the
tablet market and may have a natural monopoly. Despite those headwinds, I see
pessimism dominating for the remainder of May, and thus see Apple trading in a
narrow range. Options trading investors should stay confident because Apple is
trading at its lowest PE since Lehman Brothers was in business. After adjusting
for cash, the PE is in the low teens. Owning Apple while simultaneously selling
calls and puts against a resistance level can yield robust profits. Apple
Options Trade AAPL May 340 Straddle With this information, executing a short
straddle on AAPL May 21 340s while long the stock is the best strategy due to
the risk-return profile. A straddle is the purchase or sale of both a call and a
put at the same strike with the same expiration. With a short straddle, the
investor believes the underlying will remain near to the strike going into
expiration. In this trade the investor sells both the May 340 calls and puts. If
Apple closes above $340 the return is $7.50. If you are uncomfortable using a
short straddle, I suggest a buy-write on the AAPL May 340 Calls . A related
strategy is to sell only the out-of-the-money puts and collect the premium
without having to purchase the stock outright; the AAPL May 335 and 340 Puts are
attractive for this purpose. Selling either covered calls or puts is simply
isolating the legs of the short straddle to assume less risk. Note that if the
stock declines to the strike price, you are obligated to buy the stock (or
closeout the position). For more depth, please consult a detailed option chain.
To read my full analysis, please continue here . Disclosure: Paul Zimbardo is
long AAPL; short AAPL May 21 360 Calls.