I've followed the stock market since I was a young buck cutting my teeth on Big League Chew, wearing the now-disgraced Lenny Dykstra's No. 4 on my back. And I do not think I have seen the level of anticipation surrounding an earnings report as I have with Apple (AAPL). Too many articles to count, on Seeking Alpha and elsewhere, offered ways to play the stock ahead of earnings.
I'm on record as saying you probably should stay away from making a pre-earnings AAPL options trade of any type (it's too late now!). That does not mean you cannot use options around AAPL, or any other stock for that matter, particularly in the aftermath of earnings.
Here's a relatively conservative, but not lifeless way long-term investors can follow their bullish conviction on a stock after it reports and pulls back.
The best-case scenario looks like this. You have cash in your account to cover 100, 200 or another amount, in one-hundred share increments, of a stock you covet. The company reports earnings and, for one reason or another, the market sells the stock off. This, however, does not scare you off in the least. You remain as bullish as ever, if not more bullish.
Of course, you could just haul off and buy the stock, but you can make greater hay by selling a cash-secured put.
Consider the following timely situations.
Verizon (VZ). In many ways, Verizon reminds me of Amazon.com (AMZN). Whether they're paying Apple $400 a pop for every iPhone they sell or spending billions building out wireless spectrum, they're reinvesting in a growing business. I'm not sure why this sort of thing scares investors away. Too many companies sit on piles of cash, doing nothing for themselves or the broader economy. I laud Verizon and Amazon for, to a certain extent, sacrificing today for a more profitable tomorrow.
With the company's stock down $0.75 in the final hour of trading Tuesday on an apparently disappointing earnings report, you could move to sell the VZ February $37 put and collect roughly $0.27, which you get to keep no matter happens, for your troubles.
To get put shares, you need the stock to come under quite a bit more pressure. If it happens, fantastic, as long as you are OK owning the stock for $37 a share (effective price of $36.73), regardless of its market price at the time of assignment.
Verizon presents a great situation for investors in for the long haul. Let's say it does not breach $37 and you do not get assigned. I do not see considerable upside taking place in VZ over the next few weeks. Therefore, after February expiration, if you are not long VZ, you'll likely be able to either write another put and collect more income or just buy the stock outright at a price most likely well below $40.00.
McDonald's (MCD). What I thought was a strong report spooked investors sending MCD down by more than 2%, as of the final hour of trading. The street has concerns that McDonald's past and potential future menu price hikes to offset rising commodity and labor costs could keep some customers away or make them consume less. While that might be a logical near-term concern, it should not worry investors with a long-term time horizon.
MCD also has something else working against it - its recent $100 share price. That's a key psychological level for investors. With momentum stocks, emotion often prompts traders to run the stock up even higher, often to unsustainable levels. Recent dead cat bounces in Netflix (NFLX) provide prime examples of this phenomenon.
Selling puts is all about having the cash to back it up and being completely confident in the strike price you select. Viewing the trade from this perspective makes it no more risky than buying a stock outright only to see it fall. Let's consider the possibilities.
You sell a February MCD $97.50 put for $0.97. You collect about $97, but obligate yourself to buy 100 shares of MCD for $97.50 (effective price of $96.53) if assigned.
No matter what happens you keep that income. If you do not get assigned, you missed out on going long, but, as with VZ, you can sell another put or just break down and buy the stock.
If MCD tanks to $90 (or the put goes in the money at some point, particularly at expiration), you'll likely get assigned. Factoring in the premium income you collected, you'll have paid $96.53 a share. If you really had strong conviction going into the trade and you truly have a long-term time horizon, this should not trigger any more concern than had you bought the stock for $98.54 and watched it tank to $90. Sure you run the risk of losing money or not being able to stop yourself out of the short put, but, again, you intend to hold MCD for 5, 10, 20 years. You believe the company and the stock continues to grow just as strongly as it has historically. In this case, whether the drop occurs after an option or stock trade, you would probably wait for a bottom and buy more.
The key point that you should take into consideration when you consider selling cash-secured puts is not only are you confident enough in the company to commit yourself to a strike price that could end up being much higher than the market price if things go awry, but are you stretching yourself too thin.
If you have "just" $38,000 in your account or "only" $99,000, it might be advisable to not make this sort of play, just as it might not be advisable to not buy 100 shares of VZ or MCD outright. In this scenario, you put all of your eggs in one basket with no wiggle room. If, however, you have more capital to play with, this type of trade is likely part of a much larger portfolio strategy. Additionally, you give yourself the flexibility to either take advantage of a perceived buying opportunity or wait out the sound long-term sentiment that got you into the trade in the first place.
Additional disclosure: I am long NFLX June $40 put options.