dividend increase 1, Apple Strategy Updated Feb 1, 2016

Apple closed at 97.34 last week, after having closed the previous week at 101.42. Two of our AAPL strategies were in-the-money so we rolled them on Friday near the close; the other 2 had options expire OTM on Friday and we sold new ones shortly after the open 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
1.0%
24%/year goalITM weekly covered calls
+ dividends
2.6%
ATMATM weekly covered calls
+ dividends
-1.6%
2% OTM2% OTM weekly covered calls
+ dividends
-3.3%

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
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

At the end of the week, just before the close, AAPL was trading at 97.13. Since we didn't want the shares called away we rolled them. We bought back the 90-strike calls for 7.15, and sold the 94.50-strike for next week to generate 32 cents of premium:

Date Action $ out $ in Time Premium
1/29/16 buy 90-strike Jan 29 call 7.15 -0.02
1/29/16 sell 94.50-strike Feb 5 call 2.95 0.32

Here's the math we used to determine the 94.50-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 6.49 net call premium + paid divs
dividends yet to be paid 2016 2.08 4 x 0.52 (none paid yet)
assumed income received 8.57 net call premium + unpaid divs
current stock price 97.13 at the time we rolled
stock price + assumed income 105.70 97.13 + 8.57
income needed by Dec 31 9.18 114.88 - 105.70
weeks remaining 48 in 2016
income needed per week 0.19 9.18 / 48
YTD return 1.0% (105.70 - 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 48 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 94.50-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
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

At the end of the week, just before the close, AAPL was trading at 97.13. Since we didn't want the shares called away we rolled them. We bought back the 92-strike calls for 5.15, and sold the 95-strike for next week to generate 42 cents of premium:

Date Action $ out $ in Time Premium
1/29/16 buy 92-strike Jan 29 call 5.15 -0.02
1/29/16 sell 95-strike Feb 5 call 2.55 0.42

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 8.08 net call premium + paid divs
dividends yet to be paid 2016 2.08 4 x 0.52 (none paid yet)
assumed income received 10.16 net call premium + unpaid divs
current stock price 97.13 at the time we rolled
stock price + assumed income 107.29 97.13 + 10.16
income needed by Dec 31 19.90 127.19 - 107.29
weeks remaining 48 in 2016
income needed per week 0.48 19.90 / 48
YTD return 2.6% (107.29 - 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 41 cents per week for the remaining 48 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 41 cents of time premium was the 95-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
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

The 101-strike options expired worthless (OTM) last Friday and then this morning (Monday) we wrote new options (ATM):

Date Action $ out $ in Time Premium
1/29/16 101-strike expired OTM 0.00
2/1/16 sell 96-strike Feb 5 call 1.18 1.08

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

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 4.84 net call premium + paid divs
current stock price 96.10 at the time we rolled
stock price + actual income 100.94 96.10 + 4.84
YTD return -1.6% (100.94 - 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
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

The 103-strike options expired worthless (OTM) last Friday and then this morning (Monday) we wrote new options (2% OTM):

Date Action $ out $ in Time Premium
1/29/16 103-strike expired OTM 0.00
2/1/16 sell 98-strike Feb 5 call 0.42 0.42

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

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 3.09 net call premium + paid divs
current stock price 96.10 at the time we rolled
stock price + actual income 99.19 96.10 + 3.09
YTD return -3.3% (99.19 - 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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