dividend increase 19, Apple Strategy Updated Jan 19, 2016

Apple closed last week at 97.12, after having closed the previous week at 97.06. Markets were closed on Monday, so we're updating this on Tuesday this week.

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

Strategy Name Source of Income YTD Return
12%/year goalITM weekly covered calls
+ dividends
0.5%
24%/year goalITM weekly covered calls
+ dividends
1.5%
ATMATM weekly covered calls
+ dividends
-1.1%
2% OTM2% OTM weekly covered calls
+ dividends
-2.9%

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

Prior actions:

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
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

At the end of the week, just before the close, AAPL was trading at 97.12. Since we didn't want the shares called away we rolled them. We bought back the 89-strike calls for 8.15, and sold the 90-strike for next week to generate 28 cents of premium:

Date Action $ out $ in Time Premium
1/15/16 buy 89-strike Jan 15 call 8.15 -0.03
1/15/16 sell 90-strike call Jan 22 call 7.40 0.28

Here's the math we used to determine the 90-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 5.94 net call premium + paid divs
dividends yet to be paid 2016 2.08 4 x 0.52 (none paid yet)
assumed income received 8.02 net call premium + unpaid divs
current stock price 97.12 at the time we rolled
stock price + assumed income 105.14 97.12 + 8.02
income needed by Dec 31 9.74 114.88 - 105.14
weeks remaining 50 in 2016
income needed per week 0.19 9.74 / 50
YTD return 0.5% (105.14 - 2.08 - 102.57) / 102.57

With that, we knew that to get 12% return for the year (which includes unpaid, but expected, dividends) we need 19 cents per week for the 50 remaining 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 19 cents of time premium was the 90-strike.

24%/year goal - Apple Strategy #2

Prior actions:

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
1/8/16 98-strike expired OTM 0.00
1/11/16 sell 95-strike Jan 15 call 4.15 0.51

At the end of the week, just before the close, AAPL was trading at 97.12. Since we didn't want the shares called away we rolled them. We bought back the 95-strike calls for 2.15, and sold the 93-strike for next week to generate 53 cents of premium:

Date Action $ out $ in Time Premium
1/15/16 buy 95-strike Jan 15 call 2.15 -0.03
1/15/16 sell 93-strike Jan 22 call 4.65 0.53

Here's the math we used to determine the 93-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 7.03 net call premium + paid divs
dividends yet to be paid 2016 2.08 4 x 0.52 (none paid yet)
assumed income received 9.11 net call premium + unpaid divs
current stock price 97.12 at the time we rolled
stock price + assumed income 106.23 97.12 + 9.11
income needed by Dec 31 20.96 127.19 - 106.23
weeks remaining 50 in 2016
income needed per week 0.42 20.96 / 50
YTD return 1.5% (106.23 - 2.08 - 102.57) / 102.57

To stay on track for a 24% return for the year (which includes unpaid, but expected, dividends) we need 42 cents per week for the remaining 50 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 42 cents of time premium was the 93-strike.

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

Prior actions:

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
1/8/16 103-strike expired OTM 0.00
1/11/16 sell 98.50-strike Jan 15 call 1.65 1.51

The 98.50-strike options expired worthless (OTM) last Friday and then this morning (Monday) we wrote new options:

Date Action $ out $ in Time Premium
1/15/16 98.50-strike expired OTM 0.00
1/18/16 sell 98-strike Jan 22 call 1.80 1.40

When it came time to write new ATM options (just after the open on Jan 19) the stock was trading at 98.40. The nearest strike was 98, which was 40 cents in-the-money. Prior to writing the 98-strike, this strategy's summary was:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 3.04 net call premium + paid divs
current stock price 98.40 Monday morning
stock price + actual income 101.44 98.40 + 3.04
YTD return -1.1% (101.44 - 102.57) / 102.57

This strategy is 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

Prior actions:

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
1/8/16 105-strike expired OTM 0.00
1/11/16 sell 101-strike Jan 15 call 0.61 0.61

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

Date Action $ out $ in Time Premium
1/15/16 101-strike expired OTM 0.00
1/19/16 sell 100-strike Jan 22 call 0.84 0.84

When it came time to write new 2% OTM options the stock was trading at 98.40. The nearest strike that was 2% OTM was 100. Prior to writing the 100-strike, this strategy's summary was:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 1.21 net call premium + paid divs
current stock price 98.40 Monday morning
stock price + actual income 99.61 98.40 + 1.21
YTD return -2.9% (99.61 - 102.57) / 102.57

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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