dividend increase 1, Apple Strategy Updated Jul 1, 2016

Apple closed at 95.92 on Friday, after having closed the previous week at 93.40. All four of our AAPL strategies had in-the-money options near expiration so we bought them back and sold new options for the July 8th expiration next Friday.

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
3.8%+9.1%
24%/year goalITM weekly covered calls
+ dividends
2.8%+8.1%
ATMATM weekly covered calls
+ dividends
-5.0%+0.3%
2% OTM2% OTM weekly covered calls
+ dividends
-6.1%-0.8%
buy and holddividends -5.3%

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)

Halfway Point Update

Now that we are 26 weeks through our 52-week test, let's see how we're doing. The 12%/year strategy should be at 6% but it's only at 3.8%, so short by 2.2%. The 24%/year strategy should be at 12% but it's only at 2.8%, so 9.2% short. The ATM and 2% OTM strategies have no target return goal, and one is slightly ahead of buy-and-hold while the other is slightly behind. Buy-and-hold, after considering the 2 dividends received, is down 5.3% for the year so far.

It will be difficult for the 24%/year strategy to make up the difference in the time remaining. We have 26 weeks to generate 21.2%. That's 42.4% annualized, which is a tall order for a large cap stock like AAPL. We will continue the strategy for illustration purposes but it will likely need to write the ATM weekly option for the next 26 weeks in order to maximize the time premium received during the time remaining.

The 12%/year strategy has a good chance to succeed. It needs another 8.2% between now and the end of the year (including 2 expected dividends). That's an annualized rate of 16.4%, which should be doable as long as AAPL doesn't drop too much between now and the end of the year.

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
Q2 13 covered calls 4/1 to 7/1 35.62 49.81 3.87

A few minutes before the close AAPL was trading at 96.07. We bought back the 89.50-strike and sold next week's 95-strike options to generate 32 cents of premium:

Date Action $ out $ in Time Premium
7/1/16 buy 89.50-strike Jul 1 call 6.58 -0.01
7/1/16 sell 95-strike Jul 8 call 1.39 0.32

Here's the math we used to determine the 95-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 10.39 net call premium + paid divs
dividends yet to be paid 2016 1.14 2 x 0.57
assumed income received 11.53 net call premium + unpaid divs
current stock price 96.07 at the time we rolled
stock price + assumed income 107.60 96.07 + 11.53
income needed by Dec 31 7.28 114.88 - 107.60
weeks remaining 26 in 2016
income needed per week 0.28 7.28 / 26
2016 YTD return 3.8% (107.60 - 1.14 - 102.57) / 102.57

With that, we knew that to get 12% return for the year (which includes unpaid, but expected, dividends) we need 28 cents per week for the 26 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 28 cents of time premium was the 95-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
Q2 13 covered calls 4/1 to 7/1 21.21 31.03 8.61

A few minutes before the close AAPL was trading at 96.07. We bought back the 92.50-strike and sold next week's 96-strike options to generate 67 cents of premium (which is below our goal of 79 cents/week but was the highest time premium option available at the time):

Date Action $ out $ in Time Premium
7/1/16 buy 92.50-strike Jul 1 call 3.58 -0.01
7/1/16 sell 96-strike Jul 8 call 0.74 0.67

Here's the math we used to determine the 92.50-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 9.42 net call premium + paid divs
dividends yet to be paid 2016 1.14 2 x 0.57
assumed income received 10.56 net call premium + unpaid divs
current stock price 96.07 at the time we rolled
stock price + assumed income 106.63 96.07 + 10.56
income needed by Dec 31 20.56 127.19 - 106.63
weeks remaining 26 in 2016
income needed per week 0.79 20.56 / 26
2016 YTD return 2.8% (106.63 - 1.14 - 102.57) / 102.57

To stay on track for a 24% return for the year (which includes unpaid, but expected, dividends) we need 79 cents per week for the remaining 26 weeks in time premium. When examining the choices just before Friday's close we saw there were no options offering 79 cents for the coming week, so we chose the highest we could which was the ATM 96-strike with 67 cents of time premium.

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
Q2 13 covered calls 4/1 to 7/1 14.15 16.53 15.10

A few minutes before the close AAPL was trading at 96.07. We bought back the 93.50-strikes and sold next week's 96-strike options to generate 0.67 of premium:

Date Action $ out $ in Time Premium
7/1/16 buy 93.50-stirke Jul 1 call 2.58 -0.01
7/1/16 sell 96-strike Jul 8 call 0.74 0.67

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

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 1.36 net call premium + paid divs
current stock price 96.07 at the time we rolled
stock price + actual income 97.43 96.07 + 1.36
2016 YTD return -5.0% (97.43 - 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
Q2 13 covered calls 4/1 to 7/1 6.42 6.72 6.12

A few minutes before the close AAPL was trading at 96.07. We bought back the 95.50-strikes and sold next week's 98-strike options to generate 11 cents of premium:

Date Action $ out $ in Time Premium
7/1/16 buy 95.50-strike Jul 1 call 0.57 0.00
7/1/16 sell 98-strike Jul 8 call 0.11 0.11

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

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 0.23 net call premium + paid divs
current stock price 96.07 at the time we rolled
stock price + actual income 96.30 96.07 + 0.23
2016 YTD return -6.1% (96.30 - 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
5/5/16 dividend 0.57

This strategy's summary when AAPL was trading at 93.68 near the close Friday:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 1.09 paid dividends
current stock price 96.07
stock price + actual income 97.16 96.07 + 1.09
2016 YTD return -5.3% (97.16 - 102.57) / 102.57

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