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Michael Haden's Insights

InvestorsObserver
Options Analyst Writer
Michael Haden
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December 15, 2014 - Profiting from Apple

Everybody loves Apple stock. With a market cap that has doubled in less than two years, Apple has surpassed the previous record of $619.9 billion reached by Microsoft in 1999. With a holiday season driving sales still higher, experts expect the stock to continue to unheard of levels.

Apple has established a consistent track record of producing successful products. The iPhone 6 is out of stock in many places around the world. The iPad Mini 3 and the iPad Air 2 are out of stock in most Best Buys. The much-anticipated Apple Watch will reach stores in 2015. Further down the road are products like Apple Homekit, designed to control smart devices in the home, .and possibly an Apple TV.

Clearly, the market for Apple products is large and continues to expand. With many of us owning or looking to own this stock, the question becomes; how can we best profit from Apple's continuing success?

One strategy for a stock that we hold a bullish opinion on, would be an out-of-the-money covered call. This is one of the more conservative strategies available. To employ this strategy we will sell a call that is a little out of the money against holding the underlying shares. We will get to collect premium and still be able to enjoy capital gains if the stock moves up.


Chart courtesy of stockcharts.com

For our example trade, we will purchase 100 shares of AAPL stock trading at $112.52 and against these shares, we will sell a MAR 120 call for about $3.65. So, we pay $11,252.00 for 100 shares of AAPL and receive $365.00 for the call option. a total investment of $10,887.00.This gives us a target return of 10.6% over 99 days or 39.08% annualized, and 3.3% downside protection.  

Let's look at potential outcomes:

If, at expiration, the AAPL stock has risen to $122, or really any where above our $120 strike price, then the call will assigned and we sell the shares for $120. Our profit will be the difference between the strike price of the option and the price we paid for the position. When considering what we paid to open the trade, don't forget to subtract the premium we selected from selling the call, so instead of $112.52, we actually paid $108.87. So to calculate our profit we subtract $108.87 from $120.00 to get $11.13.

On the other hand, if APPL closes below $120 at March expiration, the sold call will expire worthless and we will get to keep the $3.65 credit we got for selling the call. Should the stock fall, that $3.65 credit will insulate our stock position from losses. Since the stock was at $112.52 when we bought it, but we actually paid $108.87, we don't incur a loss until the stock falls to that level.

Once our call expires, we can either sell the stock, or sell another call against. That would put more premium in our accounts and lower our cost basis for owning the stock even further.

As we can see, with an out of the money covered we can earn a premium that not only adds to our gains, but also provides a cushion if the stock price should go down.


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