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Apple (NASDAQ:AAPL) announced another year of blockbuster earnings last week and the tradition of analysts and other pundits demanding that Apple initiate a dividend has resumed. This is not a farfetched request as Apple did indeed pay a dividend from 1987 through 1995; however, it appears to be unlikely that management will resume the practice in the near future. As recently as February 2010, Steve Jobs made it clear his preference for maintaining cash versus returning cash to shareholders. (Bloomberg Business Week, Feb. 25, 2010):

We know if we need to acquire something -- a piece of the puzzle to make something big and bold -- we can write a check for it and not borrow a lot of money and put our whole company at risk. The cash in the bank gives us tremendous security and flexibility.

Operating under the assumption that Apple will not distribute any of its almost $60 billion in cash ($64.83 per share), what is an Apple investor to do if he or she still wants a dividend? Sure, you could sell your stock and invest in utility or financial stock that pays a healthy dividend, but then you lose your exposure to one of the most profitable and successful companies of our generation. The solution? Take advantage of Apple’s volatility and utilize covered calls!

Below I present three possible scenarios and the potential returns for the January 28 weekly options (Source: TD Ameritrade). The first scenario represents a very negative outlook for Apple the next week while the final two scenarios are more realistic in my opinion. As a general rule, selling calls with higher strike prices has more potential return but more risk due to the lower (or lack of) downside protection. For more information on the fundamentals of covered calls, read this excellent article on Investopedia.

Scenario 1: AAPL Closes at $310.10 (Down 5%)

Strike

Price

Return

Return %

Annualized

Downside Protection

315

$13.10

($3.22)

-0.99%

-72.03%

3.50%

320

$9.05

($7.27)

-2.23%

-162.61%

1.97%

325

$5.80

($10.52)

-3.22%

-235.29%

0.44%

330

$3.30

($13.02)

-3.99%

-291.20%

N/A

335

$1.70

($14.62)

-4.48%

-326.98%

N/A


Scenario 2: AAPL Closes at $326.42 (Unchanged)

Strike

Price

Return

Return %

Annualized

Downside Protection

315

$13.10

$1.68

0.51%

37.57%

3.50%

320

$9.05

$2.63

0.81%

58.82%

1.97%

325

$5.80

$4.38

1.34%

97.95%

0.44%

330

$3.30

$3.30

1.01%

73.80%

N/A

335

$1.70

$1.70

0.52%

38.02%

N/A


Scenario 3: AAPL Closes at $329.00 (Up <1% to 10 Day SMA)

Strike

Price

Return

Return %

Annualized

Downside Protection

315

$13.10

$1.68

0.51%

37.57%

3.50%

320

$9.05

$2.63

0.81%

58.82%

1.97%

325

$5.80

$4.38

1.34%

97.95%

0.44%

330

$3.30

$5.88

1.80%

131.50%

N/A

335

$1.70

$4.28

1.31%

95.72%

N/A

Based upon the details presented above, I am of the opinion that executing a buy-write on AAPL and selling the Jan. 28 320s is the best strategy due to its risk-return profile. If you are uncomfortable with this level of risk, I would suggest utilizing the 315s. Conversely, to increase potential returns, the 325s or 330s may be a better choice for your individual strategy.

Disclosure: I am long AAPL and plan to sell AAPL Jan. 28 330 Calls.