When investing in the stock market, there are no guarantees. However, there are some stocks that come close to that. Apple Inc. (NASDAQ:AAPL) is one of them. This is a company that literally sells out of everything it offers. Its fans line up for days just for the claim to be the first few with its new releases. And to boot, its clientele don’t mind overpaying for its product. So let’s call it high-tech crack.
Most of its users admit that they are stuck in its ecosystem even though there are clear alternatives. I have family members who are part of this cult. So let’s recap the fundamental situation: It has super popular products with incredible fan loyalty and premium prices. Sign me up for the stock.
Oh and by the way it has enough cash to buy its way to the top of any industry it wants overnight.
This is a stock that has a floor, and therein lies my opportunity.
Instead of buying stocks and taking the risk at face value, I prefer to sell downside risk against scenarios that are not likely to occur. Then when the options expire worthless, I keep the premium I collect for maximum gains. This is easy pickings in a name as quality as AAPL stock.
My only gripe with the company is its leadership. I have been a long-time critic of Tim Cook’s unwillingness to take risks.
Usually this is terribly worrisome but in this case, Steve Jobs left a money-making machine that has momentum to dominate for a few years more. This is good luck for Tim Cook, as he continues to push this boulder down the street and reap the rewards of a ground-breaking product known as the iPhone.
Click to Enlarge Yes, I said it … AAPL stock is still an iPhone company, and this is the biggest danger that I see to its long-term future. Eventually we will all move on to the “next big thing” and it’s not likely to be a phone. Unfortunately for AAPL fans, Cook doesn’t seem like the one to introduce it. My money would be on some other leader like Amazon.com, Inc.’s (NASDAQ:AMZN) Jeff Bezos or Tesla Inc’s (NASDAQ:TSLA) Elon Musk.
Having said all that potentially negative stuff, it’s not to argue against my bullish thesis today. In fact, it’s part of it. I offer the doubt as what I would be selling premium against. I will use this fear to generate income out of thin air.
AAPL Stock Trade Idea
The Bet: Sell the Nov AAPL $125 put naked and collect $1.25 per contract to open. I have a 90% theoretical chance that the price will stay above my strike so I can retain my maximum gains. Otherwise I could lose money below $123.75.
Even then, I don’t fear owning Apple stock at a 16% discount. If I did, I would not sell naked puts. Instead I would sell a put spread, where my risk would be much smaller.
The Safer Bet: Sell the AAPL Nov $125/$120 credit put spread, where I still have the same chances of success but with much less money on the line. Yet my rewarded is still a juicy 10% yield. Compare this with risking $150 here and without any room for error, then expecting a rally into earnings for profit. With my setup, AAPL stock could drop 16% and I still can take my max gains.
Investing is risky business, so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
