Crock Pot Trades: Playing Apple With Weekly Options

Mar.27.12 | About: Apple Inc. (AAPL)

It has been a special week at Seeking Alpha, with the site crossing 1,000,000 registered users and all. I feel like I have had too much luck throughout my life. Generally, the "work" I have done has rarely felt like work at all. Writing for Seeking Alpha easily ranks as the best and most rewarding experience of my life. And it's not all about the fame and glory (cough), the rewards come mainly from learning from the community that has assembled here.

The other day I extolled the greatness of fellow SA contributor Tim McAleenan. Today, I need to direct you to another person who falls on the "young" side of the Seeking Alpha spectrum, Paul Zimbardo. Paul writes consistently on Apple (NASDAQ:AAPL), illustrating an excellent strategy he employs regularly to generate income from his position in the stock using weekly options.

In an article published Monday, Paul contends:

... 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.

Given AAPL's run so far this week, you take on the risk of having shares called away if you wrote 595-610 weekly calls, if it has not happened already. But, like Zimbardo says, you'll be able to buy AAPL on a dip. The "risk" of losing your shares takes a backseat the income-generating possibilities strategies like Paul's can bring.

Consider the AAPL March 30 weekly options, as of roughly 11:00 a.m., Eastern time, Tuesday morning. With the stock trading up 1% at $613.43, the $615 weekly fetches $5.35, the $620 brings in $3.30 and the $625 generates $2.00. Think about that for a second.

If you took the option with the least amount of income available and wrote that call three times a month, you would squeeze roughly $600 out of 100 shares of AAPL each month. Over the course of a year, the $7,200 you could, theoretically, collect makes AAPL's dividend look like chump change. Certainly, you're flirting with losing your shares, but, like Paul argues, I do not consider that a "risk" worth concerning yourself over, particularly if you have a spiffy cost basis in the position.

I call this a "crock pot trade" because you can put it on in the morning when the weekly options get released and let it simmer all week. When it's done, you momentarily bask in the glow of option-related income, rinse out the crock part and do it all over again.

The Virtuous Cycle

But, what if you do not own AAPL shares and want in on the income-generating action? Maybe you have had the cash sitting there to buy AAPL, but you've found yourself afraid to pull the trigger. You fear that you're buying the top. Sadly, the top never seems to come and the stock has run away on you, but you still have $75,000 or so in your account that you intend to put toward AAPL.

You could use weekly options to create a virtuous cycle for yourself. Consider using that cash to support the sale of an AAPL put. As I write this you could sell the AAPL March 30th $605 weekly put and collect $2.56. The $610 weekly brings in about $4.30.

If you do not get put shares, you repeat the process next week. If you do, you can turn around and write a covered call on the first installment of April's weekly options. If you get your shares called away, don't fret. Turn around and write another put ... and so on and so forth.

While I can be, in many aspects of my investing life, an ardent buy-and-hold guy, there's something to be said for a strategy such as this. Do the math. Between selling puts and writing calls, you could bring in a healthy second income supported by cash that would be going along for the ride in AAPL anyway.

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