AAPL Covered Call Options

I’ve been starting to put in some options trades again and I wanted to finally let you guys know.

I currently have around 324 shares of Apple. While I love Apple products and like them as a stock, that is around 26% of my dividend portfolio. Ultimately I’d like to draw that down by either buying other stocks or selling some of the Apple stock.

One way to sell stock is to just open a market order and it will sell at whatever the current price is. That would definitely be a way to do it and probably the best way if I needed the money as soon as possible. However, since I’m not in a super rush for the money, I decided to take a second route. This route involves getting paid to pick the price that I want to sell it at.

Sounds impossible doesn’t it? How can I pick what I want to sell it at and get paid at the same time?

I’ll show exactly what can happen using what I actually did.

First, let me explain a concept called implied volatility (IV). IV is a calculated number that affects options’ prices as part of the Black–Scholes options pricing model. Essentially the market expects more movement for a higher IV rank stock and less for a lower IV rank stock. Any number of things can affect this ranking.

For example, a company like Apple may have a jump in IV rank before an earnings announcement or a big product release. Also, volatility throughout the market in general could also go up, affecting Apple along with other stocks. It sort of makes sense, start-ups or technology or biotech stocks generally have larger price swings than the traditional blue-chip companies.

As volatility increases, options premiums increase meaning you get more money for selling options (and it also costs more to buy them).

On July 29th, AAPL closed at approximately 123. Implied volatility (IV) was about 14.

I sold a call option with a strike price of 129 and an expiration date of September 4th. For selling that option I received $90 (or $84.99 after commissions).

To re-cap, I picked the price I wanted to sell Apple at and received $85 to do it.

Let’s go through four scenarios:

1) Apple stock drops in price: This would be the best if I wanted to just collect the premium and not sell the stock. As the stock price drops, the likelihood of the stock getting back up to the strike price of 129 decreases. Therefore, the premium that I could collect for selling the 129 call option goes down. As the premium decreases, it would also make it cheaper to buy the call option back. A potential problem with selling an option is if there’s a huge drop in stock price and you want to sell before it continues to fall further. By selling a single option contract, you are obligated to have 100 shares of stock available to an option buyer. Therefore, if Apple were to make a huge drop in price and I expected it to continue to drop, I could not sell those 100 shares of stock on the open market until I first bought the option back, relieving myself of that obligation. The good news is that since the stock dropped so much in price, you’d essentially be only paying commissions to buy the option back. The bad news is that this extra time that it would take may mean the stock continues to drop further.

2) Apple price stays the same: Options have expiration dates. So you have to be correct not only on the price range of a stock but also on its timing. If Apple stays at 123, the options premium will drop as the expiration date approaches. This intuitively makes sense. If there’s a month left for a stock to move $6 in price, there’s more opportunity for that movement to happen than if it only has a few days. That decay in options pricing is called theta decay and is one of the cool ways to collect premium without much change in stock price.

3) Apple rises to exactly $129: At any point that Apple rises to 129 or above, the stock could get called away from you. At that point you’d keep the premium ($85, in this case) which has already been deposited into your account. If the prices stays at exactly $129, you’d likely get to keep the shares since the option buyer is not quite back to even; remember he paid an $90 premium ($85 of which I got to keep after commissions) so it would need the price to go above $129.90 in order for him to break even. This would be one of the best things that could happen. You got to pick the price you wanted to sell it at and got paid to do it!

4) Apple rises above $129: This could happen as well. If Apple stock jumps to $132, you may be forced to sell the stock to someone at $129 instead of the $132 that you could get on the open market. This is exactly why someone paid you $85. He is hoping that Apple goes way above $129 since anything over $129.85 is profit for him. Here’s how that works: If Apple stock goes to $132 and he bought my option with a strike of $129, he could buy my stock for $12,900 + the $85 in premium that he already paid and then immediately sell the shares for $132, collecting $13,200 for a profit of $215. Depending on how quickly that jump in stock price happened, he would have paid $85 to collect $215 in profit over less than two months, a great return on capital. If Apple rises this much and you decide that you want to keep those 100 shares, you would have to buy the option back. Since the option is now “in-the-money,” you would have to pay more than the $85 you received as premium. However, you may be able to sell the same strike at a later time or at a higher strike and receive some credit back. This is called rolling and you may actually be able to do this for a net credit depending upon a number of variables.

With those descriptions in mind, on to the actual trades:

07/29/2015 STO 1 AAPL Sep04 2015 129 Call @ 0.90
08/12/2015 BTC 1 AAPL Sep04 2015 129 Call @ 0.14
Comm: $10.03
Profit: $65.97

08/12/2015 STO 1 AAPL Sep25 2015 119 Call @ 2.38
Comm: $5.02
Credit: $232.98

From the details above, you can see that on 7/29/2015 I sold a covered call with an expiration date of September 4th. I received $84.99 in credit for that trade. Then, since Apple stock dropped in price, I was able to buy the option back (buy-to-close) for $14 (or $19.02 after commissions). For those series of trades I made a profit of $65.97 in 13 days.

Implied volatility had also increased to the mid-70s, or else I would likely have been able to buy the option back for less. And you’ll see that the increase in IV allowed me to sell a much richer premium for the second covered call.

While I wouldn’t mind selling 100 shares at $119/share, here’s what I’m hoping: If the volatility reverts back to more of the normal, it will become cheaper to buy back the option even if the stock doesn’t move in price.

This is just the start to a series of posts I some options trades that I will be doing.

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6 Responses

  1. DivGuy says:

    Good topic to cover! I would have just bought other stocks and keep that beloved Apple, but you know! 😉


    DivGuy recently posted…Apple & Disney: Similar past, Similar Issues, Similar FutureMy Profile

    • scott says:

      Thanks, DivGuy. I love Apple too but do think I need to diversify a bit too! 🙂 With the recent drop in Apple price (along with the rest of the market), I’m getting to the point where I can buy the option back for not that much and then sell another covered call for a great premium since IV has gotten even higher (over 90 now).

  2. Gerry says:

    Good Article. I am using Covered Call Leaps for Income. It was a pleasure to see some optios material. Keep up the good work. Gerry

  3. Amber Tree says:

    I look forward to read more stories on your experience with options. I am new to the subject and stories from others can be an inspiration.
    Amber Tree recently posted…Options experiment – part III – expiration weekMy Profile

    • scott says:

      Hi Amber Tree,

      Thanks for visiting. I’m just starting with options as well so we’ll learn together. They’ve been working out well for me so far. I’ll be sure to check out your site as well!


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