Bookmark and Share 14, Weekly Apple (AAPL) Trade May 14

Based on the success of last week's weekly trade and the fact that Apple and the market are down this morning on European fears, we're going to propose another Apple trade idea. This is a 5 day covered call trade using the May 19 expiration.

Annualized Return Of 19% to 38%

There are several in the money strikes offering an annualized return of 19% or higher right now. To make one of these weekly trades, you would buy AAPL today and then sell a call option that expires this Friday, with the hope of having your stock called away.

Buy AAPL at 563.50 and then sell one of these:

Strike Call Bid Net Debit Annualized Return
540 24.90 538.60 19.0%
545 20.50 543.00 26.9%
550 16.40 547.10 38.7%

If AAPL stays above the strike you choose by this Friday then your stock will be called away and you make the Annualized Return shown. While transaction costs are not factored into the above, the bid-ask spread on these in the money options is wide, so you can probably do better than the net debit shown by placing a limit order to sell the option at the mid-point between the bid and ask.

If you are not assigned on Friday (i.e. AAPL is below the strike you choose) then you own AAPL at the net debit shown and can write another option for the next cycle. Your adjusted cost basis (i.e. break even point) is the Net Debit.

May 18, 2012: Post-expiration followup... Yikes. AAPL closed at 530.50 on the last day of trading for the above options, down 33 points in a week. All 3 strikes shown above finished out of the money, and anyone who took these trades now owns AAPL at the Net Debit shown.

So now what?

We believe AAPL is oversold and will bounce back to 540 or higher next week (it was over 542 at one point today). We suggest waiting for the bounce and then selling a weekly option with the same strike you started with for this trade. AAPL is a solid long-term company and this should be workable situation that we can manage back to a profitable outcome.

winning tradeMay 25, 2012: 2nd Update... We got the bounce we were looking for on Monday and wrote the same strikes for the following Friday. AAPL closed above the highest strike and all 3 trades were winners.

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