Writing in-the-money covered calls on Apple (NASDAQ:AAPL) is a good way to earn predictable income and have some downside protection. This article will show you how long it will take get 100 points of time premium out of your AAPL shares.
Use Weekly Options
AAPL is one of the stocks that have weekly options available. It is generally possible to earn around 8 or 9 points of premium per week if you write at-the-money options. More conservative investors will want to look at the in-the-money options, trading less risk for less reward.
Points Per Week
As I write this AAPL is at $500.50. There are 8 days remaining until these options expire on Feb. 24:
|Strike||Call Bid||Time Premium|
How Long To Get 100 Points?
Divide 100 points by the Time Premium per week:
|Time Premium Per Week||# of Weeks to Get 100 Points|
So, you could buy 100 shares of AAPL, write a call that was 25 points in the money, and earn 1.6 points week. Do it for 1.2 years and you'll make 100 points on a net investment of 473.40, for a return of 21%. Not bad for a relatively conservative strategy (and, yes, you will want to trade at a low-cost broker so that transaction costs don't kill you).
Some readers will point out that I've described an 8 day trade above, not 7 days, and so it would be hard to do every week. That is true. You could have overlapping lots of AAPL stock (so each week one 8 day trade is getting called away while you are putting on another one), or you could use limit orders when selling your calls to improve results over what I've listed above. You don't have to accept the bid of 27.10 when the bid-ask spread is 27.10 x 27.50. You can probably put in a limit order to sell a 475 strike call for 27.30 and get filled as AAPL wiggles up and down.
More Aggressive Traders
If you don't like writing options that are 25 points in the money (which is 5% for this $500 stock) then you can write strikes that are less deep in the money and earn your 100 points of time premium quicker. It is higher risk since you have less downside protection, but it is also higher reward as long as AAPL stays above your strike.
If AAPL falls below your strike on expiration then you can probably write the same strike for the following week and still get some decent time premium. The big risk is that AAPL drops more than about 10% and stays there for a while. But if you're bullish on AAPL and not totally conservative in your investing, this is an assumption you might feel comfortable making.
Disclosure: I am long AAPL.