Alexander Valtsev
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Buy Apple's Butterflies For A Quick Return By Next Friday

Apple's (AAPL) shares are down by over 6%, followed by worse-than-expected results in IPhone sales:

Volatility on the stock's options' implied volatility is also down which allows for moderate buying. I checked the straddles expiring next Friday, May 6, 2016, but they are still too expensive (3% per week or ~22% per year), especially given the fact to earnings are already out. On the other hand, I was not comfortable selling the straddles, either. They are not as expensive, as Twitter's (TWTR), and my IRR calculator shows that Twitter is a better candidate for pure options selling. If you want to learn more about Apple's strangles, click here.

On the other hand, we expect Apple to move in the short-term, especially given the recent drop in price. Bulls will either drive the stock above $100, or let it sink even lower. But there is no chance it will stay at the current level of $98 per share. If you want to capitalize on the move but do not want to risk a lot of money on the direction, try butterflies. Essentially, it s a non-directional strategy (i.e. it does not matter where the stock moves, as long as it moves) where investors both get a credit balance upfront and earn money from volatility (I said implied volatility was down, not the general market volatility). Here is how a butterfly, involving selling a $96 put, buying two $98 calls, and selling a $100 put, looks like (profits and losses are shown for one contract, which is equal to 100 shares of stock):


The above chart is full of green indicating that the trade is likely to turn profitable. However, there is a catch. And the catch is that the maximum return is almost four times lower than the maximum risk. If the stock moves by 1.6% in either direction starting tomorrow, you will already make money. However, the maximum return of $41 per one options contract is available only if you wait for a week (consume the time value of the options you sell). The likelihood of making money in this trade is extremely high but the profit is limited. On the other hand, as opposed to strangles and straddles, you know your risks and return upfront - there is no contingency here. 

Make your choice here but also remember transaction costs. This strategy is not profitable enough with one options contract. My suggestion is to go with at least five contracts in order to make a decent return.

What do you think?