Bookmark and Share Weekly Apple (AAPL) Trade January 21

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

We've now had 6 sets of weekly calls expire out of the money on our AAPL position. As of Jan 19, 2013, AAPL is below our Dec 5 purchase price by about 51 points (closed at 500 on Friday). However, we've lowered our basis between 54 and 68 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 Sell 1 Jan 19 520 call 825
Jan 21 Adjusted cost basis 48297

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 12 Sell 1 Jan 19 520 call 825
Jan 21 Adjusted cost basis 49697

On Friday AAPL closed at 500 and your adjusted cost basis is either 482.97 (if you started with 535s on Dec 5) or 496.97 (if you started with 540s). You're still in the black but significant risk exists this week...

Moment Of Truth

AAPL announces holiday quarter earnings this Wednesday, Jan 23rd, after the market closes. It will be one of the most watched earnings reports this season, and will likely drive not only AAPL but the entire market higher or lower based on the results and the guidance.

There are at least 5 ways to deal with this pending earnings report, from most bearish to most bullish:

(1) Sell your AAPL stock before earnings are announced. You have a small profit already and maybe you're nervous about a drop caused by AAPL missing the quarter or giving weak guidance. Lock in your gain and live to fight another day.

(2) Write an in-the-money call option. You won't have any upside potential on the stock but you could eek out some more time premium. The Jan 25, 460-strike can be sold for 44, or example, generating another 4 points of time premium while providing 44 points of downside protection.

(3) Write an at-the-money call option (500-strike) for this Friday (Jan 25). You will collect 17.85 in time premium, and lower your basis by the same amount.

(4) Write an out-of-the-money call option. The Jan 25, 540-strike can be sold for 4.65, for example, generating 4.65 points of time premium this week and leaving you 40 points of upside potential.

(5) Don't write an option. Just hold the stock and hope it goes up after earnings are announced. Unlimited potential upside, but also the highest downside risk of all the choices listed here.

So which should you do?

Obviously, depends on your outlook for AAPL and your risk tolerance. And whatever you do, you don't have to do it for all of your shares. If you own more than 100 shares you could do one strategy with some of your shares, and another strategy with the rest of your shares.

We believe AAPL will have a good quarter and give reasonably good guidance, causing the stock to rise in a relief rally as shorts cover and new money comes in. For purposes of this trade we recommend selling the Jan 25, 520-strike for 9.70, which leaves our two trades with the following net debits:

Dec 5
Starting Strike
Jan 22
New Strike
To Sell
Call Bid Adjusted
Net Debit
Return for
51 day trade
535 520 9.70 473.27 71%
540 520 9.70 487.27 50%

If AAPL closes above 520 by Friday then your stock will be called away and you make the Annualized Return shown over a 51 day period (Dec 5 to Jan 25).

If you are not assigned on Friday (i.e. AAPL is below 520) then you own AAPL at the adjusted net debit shown and can write another option for the next cycle. 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.

Free Trial | Covered Call Newsletter | Covered Call Blog Bookmark and Share