Bookmark and Share Weekly Apple (AAPL) Trade January 12

This is a continuation of a covered call trade we started on December 5, 2012, on AAPL.

We've now had 5 sets of weekly calls expire out of the money. As of Jan 12, 2013, AAPL is below our Dec 5 purchase price by about 31 points. However, we've lowered our basis between 46 and 60 points by selling weekly calls, so the trades are currently profitable.

Here is a recap of what we've done to date (see prior blog articles). We purchased AAPL at 551.57 on Dec 5. There were 2 strikes suggested, a 535 and 540, so we are tracking two separate trades.

If you wrote the 535s on Dec 5, this is where you are today:

Date Action Stock Option
Dec 5 Buy 100 AAPL 55157
Dec 5 Sell 1 Dec 7 535 call 1950
Dec 11 Sell 1 Dec 14 535 call 1300
Dec 17 Sell 1 Dec 22 525 call 610
Jan 2 Sell 1 Jan 4 540 call 1515
Jan 5 Sell 1 Jan 11 530 call 660
Jan 12 Adjusted cost basis 49122

If you wrote the 540s on Dec 5, this is where you are today:

Date Action Stock Option
Dec 5 Buy 100 AAPL 55157
Dec 5 Sell 1 Dec 7 540 call 1560
Dec 11 Sell 1 Dec 14 540 call 1015
Dec 17 Sell 1 Dec 22 530 call 445
Jan 2 Sell 1 Jan 4 545 call 1155
Jan 5 Sell 1 Jan 11 535 call 460
Jan 11 Adjusted cost basis 50522

On Friday AAPL closed at 520.30 and your adjusted cost basis is either 491.22 (if you started with 535s on Dec 5) or 505.22 (if you started with 540s). You could just sell the stock today and book your profits, or you could continue the trade with another 5-day at-the-money covered call on Monday morning.

If you choose to write another call, we suggest an at-the-money (ATM) call for next week. Even though this is the last expiration before earnings come out on Jan 23, we choose ATM (as opposed to last week's out of the money) because AAPL didn't do well relative to the market last week. Variety of reasons: gross margin compression concerns from low-cost iPhone rumors, worries that its fantastic growth rate has to slow down at some point (lowered guidance on the Jan 23 earnings call, perhaps), and the fact that many people who were overweighted on AAPL have been cutting back to normal weight.

We believe it's prudent for income investors to write ATM options on AAPL at this time. If it's called away before earnings then you can be happy with your 38% to 64% annualized return over a 44 day period. Suggest both trades write the 520 strike on Monday that expire this Friday:

Dec 5
Starting Strike
Jan 14
New Strike
To Sell
Call Bid Adjusted
Net Debit
Return for
44 day trade
535 520 8.25 482.97 64%
540 520 8.25 496.97 38%

If AAPL closes above the strike you choose by Friday then your stock will be called away and you make the Annualized Return shown over a 44 day period (Dec 5 to Jan 18).

If you are not assigned on Friday (i.e. AAPL is below the strike you choose) then you own AAPL at the adjusted net debit shown and can write another option for the next cycle, although there is an earnings release the following week you need to be aware of. If you don't want earnings risk, you will want to sell your stock before earnings come out Jan 23. Your adjusted cost basis (i.e. break even point) is the Adjusted Net Debit.

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.

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