How To Double Your Gains In Apple

Feb.29.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) stock enjoyed a spectacular run in the last few weeks. Some people might consider taking some profits. Who can blame them?

So what are your options when it comes to taking profits?

The first and most obvious choice would be of course just to sell the stock at the current price of $525.76. However, how about squeezing some more juice? Maybe selling covered calls?

Looking at April expiration, you can sell the 550 calls at $12.43. You sell one call against each 100 shares you own. Your gains are captured above $550 by April expiration. If the stock closes at or above $550, your gain is $2,424 from the stock plus an extra $1,243 from the sold option. The P/L graph looks like this:

(Click charts to expand)

Click to enlarge

The total gain is $3,666. Not bad at all. If you just sold at $550, you would gain $2,424. Now you have an extra $1,242.

How about some more juice?

The following strategy involves buying a 2:1 ratio call spread while owning the stock. Let's see how it works in the case of AAPL. The possible trade is:

  • Buy 1 AAPL April 2012 525 call at $23.15
  • Sell 2 AAPL April 2012 550 calls at $12.43

Again, you sell one spread against each 100 shares you own. The cost to execute this trade is close to zero (in fact you are even getting a small credit) and no additional margin is required since you own the stock. You are basically buying a 525/550 debit call spread and financing it by selling an additional 550 call, which is covered by the 100 shares of stock.

The P/L graph looks like this:
Click to enlarge

So now if the stock goes to $550 by April expiration, your gain is $5,090. You basically doubled your profits compared with just selling the stock at $550.

Hallelujah!

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