Looking back on past issues of Seller's Paradise we noticed that only one stock was in the list of top 4 covered calls every month in 2015: AAPL. Not surprising, as it is the largest company on earth ($586B current market cap), has a history of growth, and pays about a 2% annual dividend.
For review, here are AAPL's opening prices at start of each year for the last 7 years, and % change during the year:
|Year||Start of year price||% change during year|
4 Apple Investment Strategies For 2016
For 2016 we are going to track four AAPL investment strategies:
|Strategy Name||Source of income|
|12%/year goal||dividends +|
ITM weekly covered calls
|24%/year goal||dividends +|
ITM weekly covered calls
ATM weekly covered calls
|2% OTM||dividends +|
2% OTM weekly covered calls
All strategies will invest without regard to taxes (i.e. we won't optimize for long term capital gains or for qualified dividend treatment, although both should come naturally as we don't anticipate letting the AAPL shares get called away).
How to achieve 12% or 24% from AAPL in 2016
With AAPL at 102.57, a 12% return for 2016 would be $12.31. A 24% return would be $24.62. Those are the amounts we need to receive in income by Dec 31, 2016, to make the goal.
Assuming the dividend is not changed, it will account for $2.08 in annual return. So we need option premium to make up the rest. The 12%/year strategy will need 10.23 (i.e. 12.31-2.08) in time premium. The 24%/year strategy will need 22.54 (i.e. 24.62-2.08) in time premium for all of 2016.
These strategies will use in-the-money weekly covered calls to achieve the time premium goals. This is a conservative strategy with a little bit of downside protection but the tradeoff is that we will not have any upside potential in the underlying stock. If AAPL shares have a +40% year then we will be capped at either +12% or +24% depending on the strategy.
Using weekly options the 12%/year strategy will need 20 cents per week (10.23/52) and the 24%/year strategy will need 44 cents per week (22.54/52). So we plan to sell ITM covered calls that yield just over that much time premium each week. And, yes, we will be writing covered calls across earnings announcements and new product announcements. We plan to write 52 weekly covered calls in 2016 on these AAPL shares.
ATM and OTM strategies on AAPL
We will also be tracking two other strategies: (1) at-the-money, and (2) 2% out-of-the-money. The ATM strategy will write the nearest at-the-money weekly option on AAPL each week, and the 2% OTM strategy will write the nearest strike that is 2% OTM each week. The ATM options have the highest time premium, while the 2% OTM options allow for a some upside potential in the underlying (capped at 2%/week). It should be interesting to see how these strategies do for the year 2016.
Week 1 Trades For Each AAPL Strategy
AAPL opened today at 102.57. We will assume we purchase 400 shares at that price (100 shares for each of the 4 strategies), and then write the following options for the Jan 8 expiration:
Strike To Write
We will report on the 4 strategies each week here in our Blog. On expiration day if any of the options are in the money then they will be rolled just before market close. Options that are out-of-the-money will be allowed to expire and the following Monday morning new options will be sold.