dividend increase 9, Apple Strategy Updated Apr 9, 2016

Apple closed at 108.66 on Friday, after having closed the previous week at 109.99. Two of our AAPL strategies had in-the-money options near the close so we bought them back and sold new options for the Apr 15 expiration. We also sold new options for the other 2 strategies that had OTM options expiring yesterday.

To review, we are tracking 4 covered call strategies on Apple for 2016 (we are also tracking a buy-and-hold strategy for comparison):

Strategy Name Source of Income YTD Return vs. B&H
12%/year goalITM weekly covered calls
+ dividends
3.7%-2.6%
24%/year goalITM weekly covered calls
+ dividends
7.2%0.9%
ATMATM weekly covered calls
+ dividends
5.8%-0.5%
2% OTM2% OTM weekly covered calls
+ dividends
6.1%-0.2%
buy and holddividends 6.3%

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
Q1 13 covered calls 1/4 to 4/1 74.54 70.74 3.13
4/1/16 sell 107-strike Apr 8 call 3.20 0.26

A few minutes before the close AAPL was trading at 108.55 and we rolled the 107-strike options to next week's 104-strike to generate 25 cents of premium:

Date Action $ out $ in Time Premium
4/8/16 buy 107-strike Apr 8 call 1.56 -0.01
4/8/16 sell 104-strike Apr 15 call 4.80 0.25

Here's the math we used to determine the 104-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 -2.16 net call premium + paid divs
dividends yet to be paid 2016 1.56 3 x 0.52
assumed income received -0.60 net call premium + unpaid divs
current stock price 108.55 at the time we rolled
stock price + assumed income 107.95 108.55 - 0.60
income needed by Dec 31 6.93 114.88 - 107.95
weeks remaining 38 in 2016
income needed per week 0.18 6.93 / 38
2016 YTD return 3.7% (107.95 - 1.56 - 102.57) / 102.57

With that, we knew that to get 12% return for the year (which includes unpaid, but expected, dividends) we need 18 cents per week for the 38 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 18 cents of time premium was the 104-strike.

24%/year goal - Apple Strategy #2

Prior actions:

Date Action $ out $ in Time Premium
1/4/16 buy 100 shares AAPL 102.57
Q1 13 covered calls 1/4 to 4/1 47.36 46.96 6.39
4/1/16 sell 108-strike Apr 8 call 2.38 0.44

A few minutes before the close today AAPL was trading at 108.55 and we rolled the 108-strike options to next week's 106-strike to generate 45 cents of premium:

Date Action $ out $ in Time Premium
4/8/16 buy 108-strike Apr 8 call 0.56 -0.01
4/8/16 sell 106-strike Apr 15 call 3.00 0.45

Here's the math we used to determine the 106-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 1.42 net call premium + paid divs
dividends yet to be paid 2016 1.56 3 x 0.52
assumed income received 2.98 net call premium + unpaid divs
current stock price 108.55 at the time we rolled
stock price + assumed income 111.53 108.55 + 2.98
income needed by Dec 31 15.66 127.19 - 111.53
weeks remaining 38 in 2016
income needed per week 0.41 15.66 / 38
2016 YTD return 7.2% (111.53 - 1.56 - 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 38 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 106-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
Q1 13 covered calls 1/4 to 4/1 20.18 19.16 17.40
4/1/16 sell 110-strike Apr 8 call 1.04 1.04

A few minutes before the close today AAPL was trading at 108.55 so we assumed the 110-strike options would expire worthless and sold next week's 109-strike to generate $1.08 of premium:

Date Action $ out $ in Time Premium
4/8/16 110-strike expired OTM 0.00
4/8/16 sell 109-strike Apr 15 call 1.08 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 0.02 net call premium + paid divs
current stock price 108.55 at the time we rolled
stock price + actual income 108.57 108.55 + 0.02
2016 YTD return 5.8% (108.57 - 102.57) / 102.57

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

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
Q1 13 covered calls 1/4 to 4/1 8.74 8.67 8.00
4/1/16 sell 112-strike Apr 8 call 0.35 0.35

A few minutes before the close today AAPL was trading at 108.55 so we let the 112-strike expire and sold next week's 111-strike to generate $0.42 of premium:

Date Action $ out $ in Time Premium
4/8/16 112-strike expired OTM 0.00
4/8/16 sell 111-strike Apr 15 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 0.28 net call premium + paid divs
current stock price 108.55 at the time we rolled
stock price + actual income 108.83 108.55 + 0.28
2016 YTD return 6.1% (108.83 - 102.57) / 102.57

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

Buy and Hold (For Comparison)

Prior actions:

Date Action $ out $ in Time Premium
1/4/16 buy 100 shares AAPL 102.57
2/4/16 dividend 0.52

This strategy's summary when AAPL was trading at 108.55 near the close today:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 0.52 paid dividends
current stock price 108.55
stock price + actual income 109.07 108.55 + 0.52
2016 YTD return 6.3% (109.07 - 102.57) / 102.57

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