The controversy on whether to lock or unlock has been the talk surrounding Apple Inc. (AAPL) lately, with Apple stock being a big underperformer to the overall market. Since the recent Feb. 11 low of both Apple and the S&P 500, shares of AAPL have risen only 4.5% compared to a gain of 7.8% for the S&P 500.
Apple stock is also trading near the cheapest level compared to the S&P 500 over the past year, as the chart below highlights.
It is also interesting to note that at current levels, AAPL has a dividend yield of 2.15%, easily eclipsing the 10-year U.S. Treasury yield of 1.7%. Some may also argue that Apple’s credit rating should be higher than that of the U.S. government, given the onerous debt burden of the U.S.
With a cash hoard of over $200 billion, the Apple dividend is most assuredly on safe ground. The current yield on Apple bonds maturing in 2023 is 2.44%, only 29 basis points more than the yield on the stock.
This combination of comparatively cheap stock with a solid, above-market dividend yield sets up nicely in my opinion for a put sale trade, looking to be a buyer of Apple stock at a discount to the current price. By selling puts, an investor will receive the put premium now in exchange for being obligated to buy Apple stock at the strike price sold.
The Apple Stock Trade
Specifically, I would look to sell the AAPL January 2017 $80 puts for $4.60 net credit. While I normally trade shorter-term options, this is more of an investment-type trade, which is better suited to a longer time frame.
The maximum gain on this trade is $460 per each put sold. Each put sold represents an obligation to buy 100 shares of Apple stock at $80 per share should AAPL close below the $80 level on January expiration. The net cost basis on the stock would be $75.40, which is the strike price of $80 less the $4.60 premium initially received.
The net cost of $75.40 is 22% below the $96.76 Thursday closing price of Apple stock, providing a very robust downside cushion. Return on risk is 5.8% (6.1% annualized). Assuming Apple maintains its current dividend of 52 cents per quarter, the net cost of $75.40 equates to a 2.76% Apple dividend yield.
This is a leave-alone trade until expiration, with either the puts expiring worthless and you keeping the premium is Apple stock if $80 or above or you buying 100 shares of Apple stock at a net cost of $75.60 if Apple is below $80.
For investors looking to capture a 6.1% return and who are comfortable owning Apple stock at a 22% discount, selling some out-of-the money puts may be worth considering.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
