Harvesting Income From Apple’s Tree

Another after-earnings option strategy

If you can remember all the way back to September, we recommended selling a put write on Apple (NASDAQ:AAPL). That probably seemed run of the mill to any passersby, but for regular readers, you knew it was a big deal.

We opened that article by saying: “We’ve been waiting for this day for a long time, and it’s finally here.”

We’re sure that seemed melodramatic, but for us, it really was a milestone. AAPL had always been too expensive to trade before now.

The options we sold in the Strategic Trader portfolio expired in the money last week, which means we accepted 100 shares of the stock for each contract we sold.

That might sound bad, but it isn’t. In fact, it’s fantastic.

How We “Put Our Shares to Work”

It’s been a long time since we reminded Trade of the Day subscribers that we never sell puts on a stock we wouldn’t like to own, but it’s an important part of our strategy.

We don’t ever risk being put shares of a stock that’s a dud, and whenever we take possession of a stock, we sell covered calls against it to earn extra income while we hold our shares.

Early in September, the investment firm Softbank bought and sold options to create a net exposure of around $50 billion in mostly large-cap tech stocks like AAPL and Facebook (NASDAQ:FB).

The firm created a large portion of its trades in the regular options market, which led traders to worry that the rally in tech was the result of a single entity’s actions rather than a consensus among bullish investors.

That eventually led to a huge selloff in tech, which means AAPL dropped below the strike price of our put write.

As we said back then, we thought the fundamentals for much of the market were solid then, and in AAPL’s case, we still think the stock will pay off.

Right now, AAPL is in a dispute with Epic Games over Fortnite app billing. The highly-publicized debate comes as antitrust becomes a big issue in the House of Representatives. AAPL is seemingly a perfect target for antitrust action.

But as Keach Hagey of the Wall Street Journal notes, antitrust investigations take years to complete and take action on. She also points out that Alphabet (NASDAQ:GOOGL) and FB are much higher priorities for antitrust action.

There may be valid concerns over antitrust actions against AAPL in the long run, but that doesn’t change the fact that the company will launch new phones, watches, computers, headphones, etc. in the interim. It also doesn’t change the stock’s technical picture.

Collecting During Consolidation (and Banking on Big Earnings)

AAPL is still in the consolidation range it has been in since early September when the stock fell on profit-taking pressures, but we don’t believe it is going to remain in this range for long.

You can see in the chart below that AAPL is holding just below its down-trending resistance level, and it started to climb higher yesterday.

Daily Chart of Apple (AAPL) — Chart Source: TradingView

We expect the stock to break up through this resistance level in the run-up to the company’s next earnings announcement on Oct. 29, after market close.

But we don’t just want to hold the stock and hope it rises. We want to put AAPL to work with a covered call.

Because we bought shares at $125 each, we don’t want to risk having our shares called away for less than that, so our strike price has to be $125 or higher. That way, if we are called out of our common stock position, we will break even (or profit if we set our strike price higher) on the long stock portion of the position. But $125 might be a little far out of the money to collect a decent premium, but remember that earnings date?

When traders sell a covered call that expires after a company’s earnings announcement, they are taking on additional risk. The stock could move much farther on an earnings surprise, after all. That additional risk means additional premium for the option seller.

If you, like us, are looking for a way to earn extra income on your shares of AAPL, consider selling covered calls that expire after earnings. Just remember to take into account your original entry price.

On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.

 


Article printed from InvestorPlace Media, https://investorplace.com/2020/10/harvesting-income-from-apples-tree/.

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