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Play Apple Inc. (AAPL)’s Recovery at a Huge Discount for the Chance at 70% Profits

The momentous downslide in Apple Inc. (NASDAQ:AAPL) has halted with a possible double-bottom at the April $385 and June $388 lows. With Apple Inc. (NASDAQ:AAPL) nearing $450 again, the upper end of the six-month trading range at $485 could be tested and result in a breakout.

Apple Inc. (AAPL)Apple Inc. (NASDAQ:AAPL) is an expensive stock, but traders can play this recovery with the much cheaper iPhone component marker, Cirrus Logic, Inc. (NASDAQ:CRUS). The high correlation between the two stocks is apparent in the 52-week performance chart. Cirrus Logic, Inc. (NASDAQ:CRUS) is down 37% in the past year versus the recovering Apple Inc. (NASDAQ:AAPL), which is off about 23%.

Apple Inc. (NASDAQ:AAPL) vs Cirrus Logic, Inc. (NASDAQ:CRUS) Stock Chart

The company just reported fiscal first-quarter 2014 adjusted earnings of $0.47 per share, beating Zacks’ consensus estimate of $0.39, and revenue was up 56.7% from the year-ago quarter.

Looking at the chart below, we see that Cirrus Logic, Inc. (NASDAQ:CRUS) has three-year support at $12.50. For the past two months, the stock has traded between $22 and $18. An upside breakout of that range targets a move to $26.

Cirrus Logic, Inc. (NASDAQ:CRUS) Stock Chart

The $26 target is about 41% higher than current prices, but traders who use a capital-preserving, stock substitution strategy could make more than 70% on a move to that level.

One major advantage of using long call options rather than buying a stock outright is putting up much less capital to control 100 shares — that’s the power of leverage. But with all of the potential strike and expiration combinations, choosing an option can be a daunting task.

Simply put, you want to buy a high-probability option that has enough time to be right, so there are two rules traders should follow:

Rule One: Choose an option with a delta of 70 or above.

An option’s strike price is the level at which the options buyer has the right to purchase the underlying stock or ETF without any obligation to do so. (In reality, you rarely convert the option into shares, but rather simply sell back the option you bought to exit the trade for a gain or loss.)

It is important to buy options that pay off from a modest price move in the underlying stock or ETF rather than those that only make money on the infrequent price explosion. In-the-money options are more expensive, but they’re worth it, as your chances of success are mathematically superior to buying cheap, out-of-the-money options that rarely pay off.

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