How To Play Apple’s iPhone 5 Release With Options

This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

Today’s much ballyhooed launch of the iPhone 5 will bring with it all the trappings of an Apple (AAPL) product announcement. An eager press. Tim Cook on a large screen reminiscent of “1984-like” imagery. Lines of the faithful stretching around the block.

While these are all but guaranteed, one thing that isn’t, at least in my mind, is an explosive price increase. Here’s why:

1. Supply Constraints: More than a few sources are reporting that Sharp (SHCAY) can’t produce enough screens for the new iPhone. Of course Apple has dealt with supply issues before, and done very well, but still, this is a point of note. After all, not all supply constraints are created equal.

2. Competition: Google (GOOG) just introduced three new smartphones as a sort of coming out for its Motorola Mobility unit, which it purchased last May. The focus of these new products is their superiority to the iPhone 4S. And with prices less than $100, the competition could be stiff.

Keep in mind Apple earns a majority of the profits in the smartphone industry with much less than a majority of unit sales. As a result, losing a customer has a magnified effect on Apple.

3. Lack of New Product: With all the hype around the iPhone 5, investors seem to have forgotten that an Apple TV isn’t going to happen in 2012.

Remember, second quarter earnings were negatively affected because there wasn’t enough new product coming through the pipeline. When the iPhone 5 is yesterday’s news, the next burning question concerning Apple might be, “What’s next?”

4. Courtroom Drama Isn’t Over: Get ready for round two. But this time it’s in Asia. If Apple loses there, it could get very protracted or very costly or both.

If you are concerned about these trends and developments, my suggestion is to collar the Apple. Specifically, sell the company’s October 700 calls for around $10.55 and buy the October 600 puts for around $5.65.

By doing so, you protect the downside, make a few dollars, and stand a good chance of holding onto the stock if the price movement in AAPL share is not consistent with the hype surrounding the iPhone 5.

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