Today, I employed an options strategy that I've utilized on multiple occasions with decent success. Earlier in the month, I had purchased an AAPL Jul 125 contract while the stock was around 120 anticipating the continued media coverage of the iPhone. The reviews were gushing, the lines were wrapped around buildings and the press couldn't get enough coverage of the iPhone out there. I sold out in the low 130's quickly doubling my money before expiry. Of course, I could have held on longer and made a few extra bucks, but pigs get slaughtered, right?

Well, today, I took another tact. I knew that at 5:00 PM when Apple announced their earnings, the stock was going to take a massive swing either way up or way down. I just didn't know which way. So, I employed a Long Strangle option strategy. Essentially, I wanted to capture the volatility that I was expecting, but I didn't want to be caught holding a worthless put OR a worthless call if I was on the wrong side of the move. By buying both an out of the money put and and out of the money call, I didn't have to spend much money, and as long as the stock moved enough, I could more than make up for the premium I paid for the opposing side.

At the time of this writing, the stock is up $12.74, or over 9% due to an impressive earnings announcement. The specific options I purchased were (the stock was at about $136/share at the time of purchase) an August 150 Call for 2.85 and an August put for 2.15. Ideally, this earnings announcement would have been last week and I could have employed the same strategy and payed for less time value, but I'll make some of it back up on the time value remaining when I sell tomorrow. Additionally, the volatility component will likely remain high or increase following this large swing (and is now calculated from a higher base). Although I can't get a quote on an option in the aftermarket, I estimate it at around 8.50 based on where the Aug 135 was during market hours. If there's some follow-on momentum at market open, great.

The specific strategy employed here was called a Long Strangle. Here is the wikipedia definition and link to other strategies:

The long strangle is a neutral-outlook options trading strategy that involve the simultaneous buying of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying security and expiration date. It is an unlimited profit, limited risk strategy that is taken when the options trader thinks that the price of the underlying security will experience high volatility in the near term. The long strangle is a debit spread as a net debit is taken to enter the trade.

http://en.wikipedia.org/wiki/Long_strangle

I used to use this strategy in the early Google IPO days with resounding success. As the stock stopped moving so much around earnings time (in conjunction with increased options valuation anticipating volatility), the strategy stopped working (although it would have been great last week). In this case, I will likely employ this strategy again for Apple's next quarterly announcement since it will be a more telling measure of iPhone sales. Remember, there are no free rides. If earnings are met with a yawn and your underlying stock doesn't move much, you've just inherited two tax writeoffs. Incidentally, this method is also highly effective for Biotechs and Pharma leading up to the approval/denial of a key drug/biologics candidate, which can make or break the next several years for a company without a strong portfolio/pipeline.
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