Follow-Up After a Successful Naked Put Write on Apple Prior to Earnings

Now that the extreme levels of worry surrounding Apple’s earnings have subsided, and options prices have come back down to Earth, investors who wrote high-priced naked puts prior to earnings can close for a quick profit, await expiry and hope to keep the entire option premium, or consider rolling out to a future month.

My suggestion in an earlier article about naked put writing prior to Apple’s (AAPL) earnings announcement was intended to capitalize on the abnormally high levels of implied volatility which were inflating the value of put protection against a fall in Apple’s price. (See “With Apple Investors Worried, Pre-Earnings Option Pricing Looks Like an Opportunity”) I suggested that investors who would be happy to buy Apple anyway at a price of $372 could consider writing a put such as the May 390 strike. This would ensure a profit if Apple were to close anywhere above $372 by May expiry. For prices between $372 and $390, holding the option until assignment would enable the investor to acquire Apple at a discount, while for prices above $390 at expiry, the maximum $18 premium could be retained by holding until expiry, essentially continuing to provide a discount at any price up to $408. (The profit/loss curve has the same shape as that of covered call writing, but with a much lower collateral requirement.)

An alternative today would be to close the May 390 for a price of around $2.95, locking in a profit just over $15. None of us knows where Apple will be by May expiry, of course. Having achieved a profit of $1500, or around 16%, on an initial margin commitment of just $9200, and having done that in just 4 days thanks to the combination of plummeting implied volatility and a rising stock price, my own inclination is to take the profit, rather than waiting a few weeks for the extra $300 per contract.

Finally, an option further out could offer an opportunity to net additional time premium, should the stock continue to recover or move sideways. The August put at a strike of 420, for example, is currently going for just under $30. Implied volatility should be expected to climb again prior to the next quarterly report, temporarily boosting the value of the short put, but provided the stock remains above $390 by August expiry, such a position will nonetheless finish in the black.

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