Apple (AAPL), of course, still hasn't entered the ranks of dividend stocks, in spite of its shareholders' increasing clamor for it to free up some of its $51 billion cash hoard via dividends. However, there's a proven strategy that we've used repeatedly that's earned a better yield on AAPL than many high dividend stocks currently offer.
If you'd had the chance to buy AAPL at $291.60 over the past year, would you have taken that risk? How about $302.50? Given that AAPL's current 52-week range is $310.50 to $426.70, both prices would have been rather profitable. AAPL has been one of 2011's best stocks to buy for price gains, rising 23.56% year-to-date.
But you're an income investor, not a trader, and AAPL still doesn't pay dividends. So, what to do?
Solution: Create your own "dividend" from Apple via selling cash secured put options. Although AAPL doesn't pay dividends, it does have high options yields which can be very profitable.
Here's how we did it:
1. January 2011 Cash Secured Puts Trade:
On January 18, 2011, we sold Jan. 2012 $330.00 cash secured puts for $38.40, for a break-even of $291.60. These put options are worth only $.44 each at the time of this writing.
AAPL closed at $340.65 the day of this first trade, and had a 200-day moving average of $280.87 and a 50-day moving average of $322.64.
Our breakeven of $291.60 was 3.82% above AAPL's 200-day average and 9.62% below its 50-day average.
2. Oct. 2011 Cash Secured Puts Trade:
On Oct. 4, 2011, we sold July $345.00 cash secured puts for $42.50, for a break-even of $302.50. These put options are worth only $19.15 each at the time of this writing.
AAPL was trading for $372.50 the day of this trade. Its 200-day moving average was $350.55, and its 50-day moving average was $382.55.
Our $302.50 was considerably below both the long and short-term averages: 14.27% below the 200-day average and 20.9% below the 50-day average.
Of course, our October trade was helped out by the much higher market volatility present then. The VIX "fear factor" hit a high of 46.88 the day we made our Oct. trade, vs. its close at 15.87 when we made our January trade.
The much higher volatility helped us to sell put options at a strike price much further "out of the money" in Oct., ($27.50 below AAPL's Oct. 4th price), vs. selling only $10 below AAPL's Jan. 18th price.
Timing: In restrospect, the January 2011 trade was a riskier one, even though the break-even was lower, for a couple of reasons:
1. Our break-even was above the 200-day average.
2. AAPL hadn't really entered the oversold region yet. Take a look at the stochastic chart below. We placed the Jan. trade just a few days before AAPL bottomed out at a $326 level, but it wasn't until March 21st that it hit the oversold low point on the chart.
The Oct. trade's timing was much closer to an oversold reading on the stochastic chart, and the better timing has played out thus far in accelerating the profit in this trade.
Here's how the two trades compare in amount of total profit realized over roughly similar time periods:
The message from these two trades is to try to wait for oversold conditions before selling cash secured puts. All other things being equal, this will give you a better chance of realizing your potential profit quicker, and will improve your cash flow. It's yet another example of the old Buffett saying, "Be greedy when others are fearful, and fearful when others are greedy."
What to do now: Bide your time. AAPL is currently looking overbought on the stochastic chart, so wait for the next market downturn, and keep an eye on AAPL's charts to see when it hits a "valley" low point at 20 or below on its stochastic chart.
To walk through the mechanics and details of a cash secured put trade, please see this article: 2 High Yield Strategies For Hedging Dow Dividend Stocks, which also illustrates a covered call options trade.
Many of the Covered Calls trades discussed in our other articles are listed in our Covered Calls Table.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Disclosure: I'm long AAPL via being short AAPL put options.