dividend increase 22, Apple Strategy Updated Jan 22, 2016

Apple closed at 101.42 this week, after having closed the previous week at 97.12. All of our AAPL strategies were in-the-money so we rolled all 4 options near the close today.

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

Strategy Name Source of Income 2016 YTD Return
12%/year goalITM weekly covered calls
+ dividends
0.7%
24%/year goalITM weekly covered calls
+ dividends
2.1%
ATMATM weekly covered calls
+ dividends
0.3%
2% OTM2% OTM weekly covered calls
+ dividends
-0.5%

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
1/15/16 buy 89-strike Jan 15 call 8.15 -0.03
1/15/16 sell 90-strike Jan 22 call 7.40 0.28

At the end of the week, just before the close, AAPL was trading at 101.26. Since we didn't want the shares called away we rolled them. We bought back the 90-strike calls for 11.30, and sold the 90-strike for next week to generate 34 cents of premium:

Date Action $ out $ in Time Premium
1/22/16 buy 90-strike Jan 22 call 11.30 -0.04
1/22/16 sell 90-strike Jan 29 call 11.60 0.34

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 2.04 net call premium + paid divs
dividends yet to be paid 2016 2.08 4 x 0.52 (none paid yet)
assumed income received 4.12 net call premium + unpaid divs
current stock price 101.26 at the time we rolled
stock price + assumed income 105.38 101.26 + 4.12
income needed by Dec 31 9.50 114.88 - 105.38
weeks remaining 49 in 2016
income needed per week 0.19 9.50 / 49
YTD return 0.7% (105.38 - 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 49 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
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

At the end of the week, just before the close, AAPL was trading at 101.26. Since we didn't want the shares called away we rolled them. We bought back the 93-strike calls for 8.20, and sold the 92-strike for next week to generate 49 cents of premium:

Date Action $ out $ in Time Premium
1/22/16 buy 93-strike Jan 22 call 8.20 0.06
1/22/16 sell 92-strike Jan 29 call 9.75 0.49

Here's the math we used to determine the 92-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 3.48 net call premium + paid divs
dividends yet to be paid 2016 2.08 4 x 0.52 (none paid yet)
assumed income received 5.56 net call premium + unpaid divs
current stock price 101.26 at the time we rolled
stock price + assumed income 106.82 101.26 + 5.56
income needed by Dec 31 20.37 127.19 - 106.82
weeks remaining 49 in 2016
income needed per week 0.42 20.37 / 49
YTD return 2.1% (106.87 - 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 49 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 92-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
1/15/16 98.50-strike expired OTM 0.00
1/18/16 sell 98-strike Jan 22 call 1.80 1.40

Because the 98-strike options were in-the-money at the close on expiration, we rolled them to the nearest ATM options (101-strike):

Date Action $ out $ in Time Premium
1/22/16 Buy 98-strike Jan 22 call 3.25 0.01
1/22/16 sell 101-strike Jan 29 call 3.25 2.99

At the time we rolled, this strategy's summary was:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 1.59 net call premium + paid divs
current stock price 101.26 at the time we rolled
stock price + actual income 102.85 101.26 + 1.59
YTD return 0.3% (102.85 - 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
1/15/16 101-strike expired OTM 0.00
1/19/16 sell 100-strike Jan 22 call 0.84 0.84

The 100-strike options were in the money at expiration so we rolled them to the strike nearest to 2% OTM (103-strike):

Date Action $ out $ in Time Premium
1/22/16 buy 100-strike Jan 22 call 1.30 -0.04
1/22/16 sell 103-strike Jan 29 call 2.34 2.34

At the time we rolled, this strategy's summary was:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 0.75 net call premium + paid divs
current stock price 101.26 at the time we rolled
stock price + actual income 102.01 101.26 + 0.75
YTD return -0.5% (102.01 - 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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