How To Get A Discount On Apple's Stock By Selling Cash Secured Puts Options
The strategy is simple. Pick good under valued dividend stocks. We pick stocks with active and liquid options that can be used to generate income by selling covered calls and puts.
By Donald E. L. Johnson
Cautious Speculator
Apple introduced Mac Studio desktop computer Tuesday.
AAPL dipped after the new product was announced.
This provided an opportunity to sell puts and/or covered calls
After Apple (AAPL) introduced a new desktop computer, the Studio Mac, Tuesday, the stock dipped as it often does after its new products events.
With the stock at $159.38, that offered an opportunity to sell AAPL 3.25.22 $140 strike cash secured puts for $0.89.
The return on Risk (RoR) was 0.558% on the 17-day trade. If the trade or one like it was done 17 times in the next 12 months, the annualize RoR would be about 12%. AAPL’s options are very actively traded and very liquid. That makes it relatively easy to get orders filled at the mid point between the options’ bid and ask prices.
The margin of safety on the trade is 12.16%. Apple closed Tuesday at $157.44, about 14% below it’s 52-week high of $182.94. The $140 strike is 23.5% below the 52-week high, 7% below AAPL’s 50-day moving average and about 27% below Wall Street analysts’ mean target price of about $192.
The trade was done to generate premium income and possibly buy the stock at a discount if the stock drops another 12% over the next couple of weeks.
If AAPL closes below $140 on March 25, it will cost the buyer $14,000 per 100-share puts option. Selling a puts option is a bullish trade because it gives the option’s buyer the right to sell the stock to the puts seller for the strike price.
Apple’s price to free cash flow ratio (P/FCF) is a fairly reasonable 25.9. Microsoft’s (MSFT) P/FCF ratio is 34.4, Intel’s (INTC) is 20.1 and IBM’s (IBM) is 11.3. The average for the stocks in the DOW JONES 30 Industrials index is 21.1.
I did this trade because I want to buy the stock for $140, not $159.
An alternative trade might have been to buy AAPL for about $160 and sell AAPL 3.18.22 $165 covered calls for about $1.73 a share. That would have provided a 1.08% RoR, or about 39.4% annualized. The risk was that the stock would continue to drop, which is what it did after I sold the puts.
LINKs:
Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees.
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8 Stocks on $25,000 Covered Calls Watch List
If You Buy These 10 Stocks And Sell Covered Calls, Your Premiums Plus Dividends Could Top 10%
10 Dividend Stocks That Look Underpriced; Generate Premium Income By Selling Puts
Wars Breed Inflation, Rising Interest Rates, Market Turmoil
A video on how to place options trades on Think or Swim.
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 don’t have any positions in NEM or XLE. I am short AAPL puts. I have no business relationships with AAPL other than being a long-time customer, and I receive no compensation for producing this content.
@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.