Maximizing Apple Profits With Long-Dated Covered Call Options

| About: Apple Inc. (AAPL)

Although, as a rule, I stay away from long-dated options, there are times when this is the most appropriate investment. To best manage a conservative portfolio, I use options to boost profits and treat them as I would a dividend from a cash flow perspective. To minimize influence from macro events, I build a ladder for positions I want to either build or reduce exposure to. This portfolio strategy allows me to adjust both call and put orders on a monthly basis, and respond to market changes and unforeseen events.

This strategy has performed well and has advantages, but there are times when it is a better tactic to hold an option for a longer duration. One such current situation is Apple (NASDAQ:AAPL). Apple manufacturers computers, tablets, phones, iPods and various enterprise hardware and operating systems as well as music and application stores.

Stock price performance for 2011 YTD is up 34.54%, with a 52-week high of $426 and a low of $297. Apple has been a growth story for the past few years and doesn't show any sign of meaningfully slowing down. It has not held it's highs for long, and since its June lows it has dutifully marched higher. I find it a risky and expensive stock to actively trade. The downside risk of missing the next leg up has been a deterrent for selling out of my position, and raising my basis has held me back from entering at higher prices.


My thesis for AAPL is straightforward. I don't see any significant impediment to its continued growth or earnings for the next 12-18 months. This assessment is based on products currently in the market, their lifespan, and products likely in their development cycle. Price targets continue to move higher, with a range in the $500 to $600 area. Apple does face challenges, and competitors are taking aim at all its offerings, which are threats to their future business, but are unknown factors as far as magnitude of impact. These items, combined with Apple's reporting cycle, lead me to the conclusion that a long-duration covered call is the best option for generating profits in the current market.

I have selected a July 2012 Covered Call with a strike price of $510 and a premium of $11.50 as the best choice to meet my objectives of minimizing risk and maximizing profitability. The strike is 26% higher than today's price of $404.78. With nine months to expiration, this seems like an appropriate risk/reward profile.

The expiration is just following the probable date of Apple's July 2012 earnings announcements, and although it's not a trend with 100% correlation, Apple does tend to drop following its quarterly results.

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This is a case where time decay works against my ladder strategy objectives and increases my risk with a monthly covered call strategy. As the stock price climbs through the year the option prices decline. In my ladder strategy I rotate covered calls and increase the strike pricing monthly if the underlying stock is increasing in value.. Because I want to continue to hold Apple stock, this carries risk of getting assigned on a monthly basis, lowering total profitability and increasing risk.






















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By investing in a long-dated covered call option, I still maintain the risk of selling shares, but earn a yield equivalent of 2.25% while I wait. If AAPL is priced over $510 in July, I will sell the shares for a 26% gain from today and put the premium to work in other dividend-yielding companies over the next nine months.

With all the uncertainty in the global macro environment, governments adding risk, and the economic projections for the next 12 months looking tepid at best, this strategy presents a manageable risk since all the strategy downsides produce positive returns.

Disclosure: I am long AAPL.