Apple Inc. (AAPL) has recently come under pressure, which makes it an opportune time to find ways to put my Apple stock to work until it recovers.
But first, let’s quickly review the company’s prospects.
Apple has an impeccable balance sheet with a massive cash hoard. AAPL can buy its way into the top position of almost any industry if it so chooses. Its P&L is the envy of most companies. Its management pedigree is top-notch. It consistently beats expectations.
Fans of its products don’t mind overpaying for their perceived supremacy, and Apple sells out of almost every widget it manufactures.
The expert consensus is that Apple stock is undervalued by almost every metric as it sells at 12.7 trailing twelve months Price to Earnings ratio. On paper, it should carry minimal risk of debacles in the mid to long term.
While Apple stock is under pressure, the modest Apple dividend yield of 1.8% helps shareholders be a little more patient through challenging periods. But there is a way to make tough times even easier to endure: Covered calls allow me to create my own “synthetic dividends.”
To illustrate this, I will use an example of Jane, who bought the Apple stock at $100 per share and is looking to hold it for the long-term. Jane understands that in the near-term, Apple’s stock price potential may be limited as it has consistently shown resistance above $120 per share. However, Jane’s Apple shares are an asset — one she can put to work.
If Jane is a relatively active trader, she can sell Dec 11 call at the $124 strike against her long Apple stock and collect 78 cents, or $78 for a contract (which represents 100 shares). The 78 cents in premium she collects for selling calls is an impressive amount relative to the 52 cents in quarterly dividends that Apple stock pays out.
The risk of doing this comes if AAPL rises past the sold call strike price of $124 by Dec. 11. Jane then would be required to sell her stock at that price. Even then, Jane would not incur a loss, as she would keep the premium from selling the calls, and she will increase her profits from the additional Apple stock price appreciation up to the sold call of $124. The only downfall is that she would have exited the stock and would then need to re-enter it long.
She could opt to sell a call higher than $124 strike and accept less in return, thereby reducing her chances of being called away from her Apple stock; for example, the $125 strike call for Dec. 11 sells for 62 cents. This would give Jane another dollar on the upside before she gets called away, yet still leave her with an impressive 20% increase.
Available call premiums for Dec. 11 expiration
It turns out that Jane doesn’t want to be so actively trading, yet she still wants to create her own dividends. She can accomplish the same goal but use longer-dated options, such as the January expiration contracts. This would allow her to give AAPL even more room to run before her stock would be called away and still collect a hefty premium for selling covered calls.
She can sell the January monthly call at the $130 strike level and collect 90 cents per contract. Again, this is an impressive almost 73% increase in dividend in about 65 days. If Apple rises higher than $130 between now and 65 days, her stock could be called away and she would be forced to sell it at $130. Should that happen, she would get to keep the premium she collected and add to her profits from her Apple stock appreciation all the way to $130.
Available Apple call premiums for Jan 2015 contract
If Jane wants to do this, but once a year, then she can sell the Jan 2017 $160 strike calls and collect a massive $2.81 per contract, more than doubling the annual dividend that Apple pays. Her risk is that Apple rises through $160 between now and mid-January 2017 (437 days) when she would be forced to sell her Apple stock at $160.
This sounds bad, but in reality she gets to increase her profits from going long Apple stock now. She gets to keep the $2.81 premium she collected and she would have gained $60 per share from appreciation. If she is called away from her stock, Jane can re-engage long Apple from there on out if she so chooses.
Available Apple call option premiums for Jan 2017 contracts
Selling covered calls can be done for any ticker that offers options. Naturally, your account has to allow trading these options.
Lastly: I always use limit orders when entering covered calls, and I always triple check the accuracy of the premiums offered. You should do the same.
As of this writing, Nicolas Chahine did not hold a position in any of the aforementioned securities.
