Selling Apple Puts Works For Options Portfolio

| About: Apple Inc. (AAPL)

In late 2011, I started a theoretical options portfolio on this site. The portfolio was aimed at either options traders or those who were looking to add some risk to a potential portfolio. The options portfolio has done mostly well. Only 3 positions have been closed (2 of which were rolled forward), and 2 of those 3 were up, resulting in huge gains, while the only miss was a small one.

Today, in addition to updating the portfolio's performance, I will cover one of the holdings in detail. Here's the portfolio, at start, not including the three trades above:

Name Month Type Strike Action Price
Apple (NASDAQ:AAPL) July Put $425 Sell $33.45
Interdigital (NASDAQ:IDCC) March Call $55 Buy $4.80
SPDR Gold Trust (NYSEARCA:GLD) February Put $170 Sell $12.85
Molycorp (MCP) March Call $22.50 Buy $3.65
Amazon (NASDAQ:AMZN) July Put $170 Sell $11.75
Boston Beer (NYSE:SAM) March Call $100 Buy $6.20
Visa (NYSE:V) March Call $95 Buy $6.30

Now, I had originally had a put trade on both Amazon and Apple, along with a call trade on Google. The three trades netted a profit of of about $26 per contract traded. When I last updated the portfolio in mid January, I closed out the Amazon and Apple puts, since the puts were almost worthless at that points.

Now here is how the holdings have done since my last update:

Symbol 1/18 2/6 Change
AAPL $33.45 $15.30 $18.15
IDCC $2.00 $0.10 ($1.90)
GLD $9.40 $3.95 $5.45
MCP $7.60 $5.70 ($1.90)
AMZN $11.75 $11.25 $0.50
SAM $5.20 $5.70 $0.50
V $10.10 $12.60 $2.50

Overall, the portfolio has done quite well. I am currently anticipating that the Interdigital calls will expire worthless in March, as they were bought in hopes of a takeover. The company has since decided not to sell itself. Also, the GLD puts will expire next week, and I will make a corresponding move with that as we get closer to expiration.

But today, it's all about Apple. When I started the original options portfolio, the original trade on Apple was selling $375 puts that would expire in February. You received $18.15 for every contract sold. Apple at that time was trading around $400. This trade gave two benefits. One, if Apple closed above $375 by February expiration, you gained $18.15. The second benefit would be buying Apple at $370, which most investors would see as a long-term steal.

At that time, I expected Apple wouldn't trade below $375, and for the most part, it stayed above that level, and above $400 at times. That trade worked well, which is why I started the new Apple put sale. This one was selling Apple $425 puts, expiring in July, for a credit of $33.45. Apple has since blown out earnings expectations, and with the stock near all-time highs, the position has already made more than $18 per credit. I've recommended buying Apple stock if it pulls back to $425, but many have told me that we won't see Apple at that level ever again, barring some market crash or unforeseen event. The way Apple has been trading lately and given its future prospects, these puts should expire worthless in July. However, it might be worth closing out your position a month or two early if they get down to like a dollar or two, which is what I did with the Amazon and Apple original positions. There isn't much to really gain in that last month or two, especially if you want to start new positions.

Now let's look at Apple now. It closed Monday at roughly $464. If you sold an Apple $465 July put, you would receive about $31 right now. That means Apple would have to drop below $434 by expiration for you to lose money. Does that scenario sound likely to you? Most would say no. Given Apple's recent run up, I might advise waiting if you want to sell puts on Apple. If you get a pullback to, say, $455, you could sell the $455 puts, hopefully for the same roughly $31, depending on how soon we get there, and on volatility.

I focused on Apple because put selling has been another way to play this stock as it has run up throughout the years. Volatility isn't as high as it used to be, so premiums have come down, but you can still make plenty of money selling puts on a rising stock. Put selling is risky, and not suitable for all investors, but for those willing to take a risky, it's a great strategy that can lead to some great profits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.