Apple (NASDAQ:AAPL) is the largest publicly traded company in the world and has completely transformed every industry it operates in. Steve Jobs' focus on innovation has permeated the company and created a commitment to consumers that has handsomely rewarded shareholders throughout the years. I have recommended option strategies for Apple since 2010 with tremendous results (remember past results do not guarantee future results).
For reference, please view the first and other articles in the series to fully understand the strategy and its strong potential returns. In essence the investment objective is to capitalize on Apple's volatility by selling out-of-the-money options to generate weekly income without sacrificing long-term returns.
A brief recap of this week in Apple [Down $2.32 (-0.4%)]:
- Apple Announces First Dividend Since 1995(March 21 Wall Street Journal)
- Apple Sold Three Million New iPads on Launch Weekend (March 19 Apple Insider)
- BATS Flash Crash Shows Erratic Trading on Apple (March 24 Fortune)
The Apple rollercoaster was in full effect this week as Apple surged to a new all-time high of almost 610 before declining to settle at 596. This was the week that all Apple watchers have been waiting for. Apple finally made an announcement regarding its nearly $100B "cash" stockpile and announced a dividend with an estimated yield around 1.8% and a $10B share repurchase plan. So the answer to "Should You Buy A Dividend Paying Apple" is the same as it was to the question "should you buy the non-dividend paying Apple". A resounding yes.
This is a well-managed company that continually innovates and is now strengthening its resolve to return money to shareholders. Both the dividend and share repurchase are welcome news but those are peripheral reasons why you should own Apple. Apple is a critical component of any investors portfolio because it is one of the fastest growing large technology companies and has a penchant for being two steps ahead of competitors in a very fast moving field, which is no easy feat.
I have been asked recently if Apple's dividend decision will held shed the popular opinion that dividends are only for older investors. Just as Apple made the MP3 player and smartphone cool, can it do the same for dividends? I am a little biased because I have always been a supporter of dividends so I do not think of them as only eligible for risk-averse investors. There is a place in everyone's portfolio for solid dividend paying stocks because they provide a dependable return cushion that you can fall back upon.
Dividends are historically for mature companies that will no longer grow at their elevated historical growth rates but Apple is a special case as detailed above. Yes, the TTM P/E is now starting to creep up to more reasonable levels and I cannot proclaim that Apple is a screaming near-term buy like I have been since before 2010. Despite that Apple is uniquely positioned with dominating "cash cow" products like the iPod and iPhone that will continue to fund its growth as its newer products such as the iPad and unannounced iTV will drive the future.
I predicted last week for new iPad sales of "1.5 million, only due to shortages of the device and the difficult to manufacture screen" and it is clear that I grossly underestimated. Actual sales came in three million for the new iPad and there was likely a significant sales bump for the iPad 2 at its reduced price points. For comparison, US traffic for the new iPad now commands over seven percent of total iPad sales (and rising daily, the site is in real time!).
Competition from Amazon (NASDAQ:AMZN) Kindle Fire and Google (NASDAQ:GOOG) Android tablets is certainly worth monitoring but tablets from those companies simply whet the appetite for the true Apple experience. Google is certainly a competitor in the smartphone arena but I think the tablet wars are effectively won due to Apple's ecosystem and strong barriers to entry.
Below I present three possible scenarios and the potential returns for the Apple options. The first scenario represents a negative outlook for Apple while the final two scenarios are more reasonable. These scenarios are just projections and there is no guarantee that they will come to fruition. Even if you are optimistic it is important to generate both positive and negative circumstances in order to stress your assumptions. As a general rule, selling calls with higher strike prices has greater potential return but additional risk of loss due to the lower (or lack of) downside protection. For more information on the fundamentals of covered calls, consult Investopedia.
Additionally, if you would like even more information, I have prepared a sensitivity analysis for absolute return and percent returns, respectively. After studying the information above, these two charts make it easy to pick a strike price based on where you believe Apple will close at the end of the week. Estimate where you believe Apple will close and select the strike price with the highest return.
With this information, executing a buy-write on AAPL March 30 (Weekly) 600s is the optimal risk-return strategy. The time value ratios have declined precipitously but picking up $6.50 for options that are $5 out-of-the-money is a fair deal. Please consult with your accountant or personal financial planner. If you are uncomfortable with this strategy I suggest a buy-write in the range of 595-610s. Even if you are extremely bullish you can still profitably sell covered calls; Apple is volatile enough that you will have opportunities to repurchase on dips. An alternative approach is to sell out-of-the-money 590 puts and collect the premium without having to purchase the stock outright. Note that if the stock declines to the strike price, you are obligated to buy the stock (or closeout the position).
Additional disclosure: Plans to write AAPL Mar 30 600 Calls.