dividend increase 11, Apple Strategy Updated Jan 11, 2016

We picked a really bad week to start a year-long options income experiment with AAPL. Yikes. But let's stick with it and see how we do after 52 weeks. If we can come out ahead after such a poor start then the strategies will be that much more impressive.

To review, we are tracking 4 covered call strategies on Apple for 2016:

Strategy Name Source of income
12%/year goaldividends +
ITM weekly covered calls
24%/year goaldividends +
ITM weekly covered calls
ATMdividends +
ATM weekly covered calls
2% OTMdividends +
2% OTM weekly covered calls

In all cases our initial purchase of AAPL was done at $102.57 on Jan 4, 2016. See the goals for the year and initial option sales here. (definitions for ITM, ATM, and OTM)

12%/year goal - Apple Strategy #1

Starting position:

Date Action $ out $ in Time Premium
1/4/16 buy 100 shares AAPL 102.57
1/4/16 sell 95-strike Jan 8 call 7.80 0.23

At the end of the week, just before the close, AAPL was trading at 97.06. Since we didn't want the shares called away we rolled them. "Rolling" is a 2-part transaction where you buy back the short option and then sell another option with a different strike and/or expiration. In our case we sold the 89-strike to generate 29 cents of premium:

Date Action $ out $ in Time Premium
1/8/16 buy 95-strike Jan 8 call 2.06 0.00
1/8/16 sell 89-strike Jan 15 call 8.35 0.29

Here's the math we used to determine the 89-strike was the right strike to keep us on track for 12%/year:

Item Value Notes
starting capital 102.57 Initial cost of shares
Dec 31 goal for 12% return 114.88 102.57 * 1.12
actual income received 5.74 7.80 - 2.06
dividends yet to be paid 2016 2.08 4 x 0.52
assumed income received 7.82 5.74 + 2.08
current stock price 97.06 at the time we rolled
stock price + assumed income 104.88 97.06 + 7.82
income needed by Dec 31 10.00 114.88 - 104.88
weeks remaining 51 in 2016
income needed per week 0.20 10.00 / 51

With that, we knew that to get 12% return for the year (which includes unpaid, but expected, dividends) we need 20 cents per week for 51 weeks in time premium. When examining the choices just before Friday's close we saw the deepest in-the-money option we could sell that provided at least 20 cents of time premium was the 89-strike. It's not a bad idea to overshoot the premium target a little bit (i.e. 29 cents instead of 20) so that if there's slippage or transaction costs we'll still be able to make our overall annual goal.

24%/year goal - Apple Strategy #2

Starting position:

Date Action $ out $ in Time Premium
1/4/16 buy 100 shares AAPL 102.57
1/4/16 sell 98-strike Jan 8 call 5.03 0.46

We let the 98-strike options expire worthless (OTM, or out-of-the-money) last Friday and then this morning (Monday) we wrote new options that expire this coming Friday:

Date Action $ out $ in Time Premium
1/8/16 98-strike expired OTM 0.00
1/11/16 sell 95-strike Jan 15 call 4.15 0.51

Here's the math we used to determine the 95-strike was the right strike to keep us on track for 24%/year:

Item Value Notes
starting capital 102.57 Initial cost of shares
Dec 31 goal for 24% return 127.19 102.57 * 1.24
actual income received 5.03 5.03 - 0.00
dividends yet to be paid 2016 2.08 4 x 0.52
assumed income received 7.11 5.03 + 2.08
current stock price 98.64 Monday morning
stock price + assumed income 105.75 98.64 + 7.11
income needed by Dec 31 21.44 127.19 - 105.75
weeks remaining 51 in 2016
income needed per week 0.42 21.44 / 51

To stay on track for a 24% return for the year (which includes unpaid, but expected, dividends) we need 42 cents per week for 51 weeks in time premium. When examining the choices Monday morning we saw the deepest in-the-money option we could sell that provided at least 42 cents of time premium was the 95-strike (offering 51 cents of time premium).

ATM (at-the-money) - Apple Strategy #3

Starting position:

Date Action $ out $ in Time Premium
1/4/16 buy 100 shares AAPL 102.57
1/4/16 sell 103-strike Jan 8 call 1.39 1.39

The 103-strike options expired worthless (OTM) last Friday and then this morning (Monday) we wrote new options:

Date Action $ out $ in Time Premium
1/8/16 103-strike expired OTM 0.00
1/11/16 sell 98.50-strike Jan 15 call 1.65 1.51

When it came time to write new ATM options the stock was trading at 98.64. The nearest strike was 98.50, which was 14 cents in-the-money. Prior to writing the 98.50-strike, this strategy's summary was:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 1.39 1.39 - 0.00
current stock price 98.64 Monday morning
stock price + actual income 100.03 98.64 + 1.39

This strategy is really simple to implement and track. Each Friday we either let the option expire (if OTM) and wait until the following Monday morning to write a new option, or buy the option back (if ITM) and then sell another option right away. The reason we treat OTM and ITM slightly differently is to optimize for transaction costs -- rather than buy back the OTM option for 5 cents at the close on Friday we just let it expire.

2% OTM (out-of-the-money) - Apple Strategy #4

Starting position:

Date Action $ out $ in Time Premium
1/4/16 buy 100 shares AAPL 102.57
1/4/16 sell 105-strike Jan 8 call 0.60 0.60

The 105-strike options expired worthless (OTM) last Friday and then this morning (Monday) we wrote new options:

Date Action $ out $ in Time Premium
1/8/16 105-strike expired OTM 0.00
1/11/16 sell 101-strike Jan 15 call 0.61 0.61

When it came time to write new 2% OTM options the stock was trading at 98.64. The nearest strike that was 2% OTM was 101. Prior to writing the 101-strike, this strategy's summary was:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 0.60 0.60 - 0.00
current stock price 98.64 Monday morning
stock price + actual income 99.24 98.64 + 0.60

This strategy is also simple to implement and track. Each Friday we either let the option expire (if OTM) and wait until the following Monday morning to write a new option, or buy the option back (if ITM) and then sell another option right away.

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