Time to nibble at Apple now that it's stock is down 20% from its all time high?
Barchart.com has an 8% sell rating on Apple's stock after a big drop in its price. At the beginning of the pandemic in March 2020, AAPL plunged about 36% in a few weeks. Can that happen again?
By Donald E. L. Johnson
Cautious Speculator
At some point Apple’s stock will bottom out and speculators will want to buy the stock or AAPL calls. Premarket, AAPL looks to open higher this morning.
Some will buy Apple planning to hold it for years.
Others will buy the stock hoping to make a quick profit.
And while Apple doesn’t pay much of a dividend, its options are very liquid, which makes trading AAPL puts and calls relatively lucrative for income traders.
This article describes several approaches to trading covered calls options on Apple’s stock.
The most bearish Wall Street Apple stock analyst has a target price of $130, or about 11% below it’s current $145.91 and down about 28.9% from it’s all time high of $182.94, which was hit in late December 2021.
AAPL is looking close to oversold and ready to snapback, but the company faces world wide economic, political and regulatory challenges. Its worsening fundamentals may overwhelm any optimism that technicians may be dreaming about. No one can predict economic developments or stock prices with any confidence.
At the beginning of the pandemic in March 2020, Apple’s stock lost about 36% in a few weeks. While historical price movements can not be used to predict anything, they serve as a warning that stocks can be very volatile.
Yet, there are low risk ways to nibble at AAPL’s stock should anyone want to give it a try.
A not so cautious speculator could buy 100 shares AAPL at about $145.91 a share, or $14,591. Then he could sell one AAPL 3.1.23 expiration $145 covered call option for about $2.87 a share, or $287. That would yield an annualized return on risk of about 63.3% if the same seven-day trade or one like it was done every seven days for 12 months.
The delta of .55 suggests that the probability that the stock would close above $145 on expiration day is about 55%. There is about a 46% probability that the covered call option would expire out of the money (OTM) and worthless on March 10.
If the speculator is a little more optimistic that AAPL will rally in the next week, he could buy the stock for about $145.91. Then he could sell one AAPL 3.10.23 $146 strike (delta .49, OTM probability 52.66%) covered calls for about $2.30 a share. If the stock is flat next week and not called, the ARoR would be about 64%. If the stock gains, the calls would be exercised and the trader would get a small gain. But if the stock goes, to, say $150, the call seller would sell his apple for $146.
Every trader has to decide how to manage her risks by looking at the deltas, charts and stock fundamentals as well as overall market trends. Some go for quick small profits, and some take less risks for smaller returns. Weekly options generally generate higher ARoR.
I sometimes trade weeklies a few days into a week to limit risks. That is, I do two- and three-day trades. And I sometimes will write (sell) weekly covered calls and take small profits or losses after only a few days for various reasons. While doing that is never my plan, it’s always a possibility.
A covered call strategy that involves less capital is called a “poor man’s covered call.”
A speculator might buy one AAPL 7.21.23 (141 days) $130 strike (delta .76, OTM probability 31%) call for about $15.25, or $1,525. Then she would sell one nearby AAPL 3.17.23 (14 days) $160 (delta 0.04, OTM probability 96%) covered call for about $0.13 a share. The one-week RoR would be about 0.85%. That would be about 22% annualized if about the same kind of trade could be done on a stock or ETF 26 times a year.
The goal is to repeatedly write covered calls on the July calls without having the nearby covered calls called. If the nearby covered calls are exercised, the investor would have to buy the stock to comply with the covered call option contract. The hope is that between now and mid July, Apple will rally. The delta of 0.76 indicates that for every dollar move in Apple’s stock price, the July call option will move about $0.76.
The exit strategy would be to stop rolling the weekly nearby calls forward and sell the July call at a nice profit sometime before it expires.
LINKs:
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Beware. Like all investing, trading stocks and options is risky. 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 receive no compensation for producing this content nor for any links.