Apple’s Bullish Trend Good For Selling Covered Calls; Buying The Stock In This Market?

How AAPL owners can sell options without having their shares called. And how speculators can play AAPL for short-term calls trades.

By Donald E. L. Johnson

Cautious Speculator

• Trading scenarios for buyers and owners of AAPL.

• Do you want to buy AAPL and ride it much higher while earning premium income on covered calls?

• Do you want a quick capital gain with a nice annualized return on risk?

Apple continues to trend higher but it is near or over some target prices and fair value estimates in a market that is testing its support and resistance levels.

AAPL is at about $172.73, up about 72% from July 2020. Support is at the January low of about $156 and resistance is at the early January high of about $183. The academic fair value estimate (FVE) for AAPL is $159 while the mean target price for brokerage firms’ usually bullish sell side analysts is $180, according to StockRover.com. Valuentum.com's FVE is $170 with a scenario range of $136 to $204).

The markets are facing head wins that may limit AAPL’s gains for awhile. This means that some traders won’t buy the stock until it corrects and bottoms out.

Others who own 100 shares of the stock at, say, $100 per share could sell covered calls to generate premium income and lower their net debits over time. The net debit is the price of the stock less dividends and options premiums collected over a few days or years.

A new options trader who bought AAPL at $100 might sell one AAPL 3.18.22 (39 days) expiration $190 strike call (delta .20, or 20% probability of exercise) for $0.50 per share, or a .5% return on risk (RoR), 4.68% annualized.

If new to options trading, try one-option per trade every month for several months. When you’re comfortable with the process, do something more aggressive, or more cautious.

Should it look like the stock is about to be called, give back part of your stock gain from the date of the option trade to buy back the call option. That is, if the stock goes from about $172 to $191 at expiration, it will be assigned, or called and you’ll sell the stock for $190 a share.

To avert the assignment and keep the stock, give up $1 of the $18 gain to buy the option back before expiration, usually in the last week before expiration. Always feel free to ask questions about this process and anything else in the comments section below.

An experienced trader might sell one AAPL 2.25.22 (18 days) $182.50 call (delta .14) for $0.67, or a 0.67% RoR, 13.6% annualized.

And traders who have time to watch trades closely and who want to limit the risk of having their stock called could sell AAPL 2.11.22 (11 days) $182.50 calls for $0.36, or a 0.36% RoR, or 11.95% annualized.

In a buy/write trade (buy a stock, sell covered calls on it), a trader might buy AAPL for $171.94. Then sell 2.18.22 $175 calls for $1.88, or a 1.09% RoR, about 36% annualized.

Annualized means that if a trader does the same kind of trade every 11 days for a year, or 33 times a year, that is the annualized return on the risk of buying a stock and writing covered calls on it. Gains or losses on the stock over the year plus collected dividends are not included in that calculation.

Question: Will you hold or buy AAPL? Do you buy, sell or sell its puts and calls?

LINKs:

Home Page.

Calls vs Puts Options: What’s the Difference?

Beware

Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, you might want to let someone else do your trading. Consider an option trading ETF like XYLD, which I own. I also trade its calls and puts. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I reserve the right to trade any of the listed stocks and options at any time. I own don’t own or have options  on the stocks mentioned in this article.

@realDonJohnson. I’m active on twitter where I tweet and link to tweets about stocks that I like.