dividend increase 21, Apple Strategy Updated Oct 21, 2016

Apple closed at 116.60 on Friday, after having closed the previous week at 117.60. One of our AAPL strategies had in-the-money options at expiration so we bought them back and sold new options for the Oct 28 expiration.

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
7.5%-7.7%
24%/year goalITM/ATM weekly covered calls
+ dividends
8.0%-7.1%
ATMATM weekly covered calls
+ dividends
1.3%-13.9%
2% OTM2% OTM weekly covered calls
+ dividends
3.6%-11.6%
buy and holddividends 15.2%

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
Q2 13 covered calls 4/1 to 7/1 35.62 49.81 3.87
Q3 13 covered calls 7/1 to 9/30 46.31 31.45 5.29
9/30/16 sell 112-strike Oct 7 call 1.64 0.61
10/7/16 buy 112-strike Oct 7 call 2.07 -0.01
10/7/16 sell 113-strike Oct 14 call 1.63 0.57
10/14/16 buy 113-strike Oct 14 call 4.61 -0.01
10/14/16 sell 116-strike Oct 21 call 2.16 0.56

A few minutes before the close AAPL was trading at 116.49. We bought back the 116-strike and sold next week's 110-strike options to generate 51 cents of premium.

Date Action $ out $ in Time Premium
10/21/16 buy 116-strike Oct 21 call 0.50 -0.01
10/21/16 sell 110-strike Oct 28 call 7.00 0.51

Here's the math we used to determine the 110-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 -6.22 net call premium + paid divs
dividends yet to be paid 2016 0.57 1 x 0.57
assumed income received -5.65 net call premium + unpaid divs
current stock price 116.49 at the time we rolled
stock price + assumed income 110.84 116.49 - 5.65
income needed by Dec 31 4.04 114.88 - 110.84
weeks remaining 10 in 2016
income needed per week 0.40 4.04 / 10
2016 YTD return 7.5% (110.84 - 0.57 - 102.57) / 102.57

With that, we knew that to get 12% return for the year (which includes unpaid, but expected, dividends) we need 40 cents per week for the 10 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 40 cents of time premium was the 110-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
Q3 13 covered calls 7/1 to 9/30 30.41 16.95 11.61
9/30/16 sell 113-strike Oct 7 call 1.05 1.02
10/7/16 buy 113-strike Oct 7 call 1.07 -0.01
10/7/16 sell 114-strike Oct 14 call 1.02 0.96
10/14/16 buy 114-strike Oct 14 call 3.61 -0.01
10/14/16 sell 118-strike Oct 21 call 0.98 0.98

A few minutes before the close AAPL was trading at 116.49. We let the 118-strike expire worthless and sold next week's 115-strike options to generate 1.86 of premium.

Date Action $ out $ in Time Premium
10/21/16 118-strike expired OTM 0.00
10/21/16 sell 115-strike Oct 28 call 3.35 1.86

Here's the math we used to determine the 115-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 -5.67 net call premium + paid divs
dividends yet to be paid 2016 0.57 1 x 0.57
assumed income received -5.10 net call premium + unpaid divs
current stock price 116.49 at the time we rolled
stock price + assumed income 111.39 116.49 - 5.10
income needed by Dec 31 15.80 127.19 - 111.39
weeks remaining 10 in 2016
income needed per week 1.58 15.80 / 10
2016 YTD return 8.0% (111.39 - 0.57 - 102.57) / 102.57

To stay on track for a 24% return for the year (which includes unpaid, but expected, dividends) we need 1.58 per week for the remaining 10 weeks in time premium. When examining the choices just before Friday's close we saw the 115-strike was offering 1.86 of 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
Q3 13 covered calls 7/1 to 9/30 27.41 15.06 12.72
9/30/16 sell 113-strike Oct 7 call 1.05 1.02
10/7/16 buy 113-strike Oct 7 call 1.07 -0.01
10/7/16 sell 114-strike Oct 14 call 1.02 0.96
10/14/16 buy 114-strike Oct 14 call 3.61 -0.01
10/14/16 sell 118-strike Oct 21 call 0.98 0.98

A few minutes before the close AAPL was trading at 116.49. We let the 118-strike expire worthless and sold next week's 116-strike options to generate 2.32 of premium.

Date Action $ out $ in Time Premium
10/21/16 118-strike expired OTM 0.00
10/21/16 sell 116-strike Oct 28 call 2.81 2.32

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

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received -12.62 net call premium + paid divs
current stock price 116.49 at the time we rolled
stock price + actual income 103.87 116.49 - 12.62
2016 YTD return 1.3% (103.87 - 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
Q3 13 covered calls 7/1 to 9/30 14.97 5.16 4.55
9/30/16 sell 115-strike Oct 7 call 0.33 0.33
10/7/16 115-strike expired OTM 0.00
10/7/16 sell 116-strike Oct 14 call 0.32 0.32
10/14/16 buy 116-strike Oct 14 call 1.61 -0.01
10/14/16 sell 120-strike Oct 21 call 0.33 0.33

A few minutes before the close AAPL was trading at 116.49. We let the 120-strike expire worthless and sold next week's 119-strike options to generate 1.48 of premium.

Date Action $ out $ in Time Premium
10/21/16 120-strike expired OTM 0.00
10/21/16 sell 119-strike Oct 28 call 1.48 1.48

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

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received -10.21 net call premium + paid divs
current stock price 116.49 at the time we rolled
stock price + actual income 106.28 116.49 - 10.21
2016 YTD return 3.6% (106.28 - 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
8/4/16 dividend 0.57

This strategy's summary when AAPL was trading at 116.49 near the close Friday:

Item Value Notes
starting capital 102.57 Initial cost of shares
actual income received 1.66 paid dividends
current stock price 116.49
stock price + actual income 118.15 116.49 + 1.66
2016 YTD return 15.2% (118.15 - 102.57) / 102.57

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