I might have to hire an assistant to keep up with the emails I receive about how to handle a position in Apple (AAPL). I can only imagine how many somebody like Jim Cramer gets.
Here's one I received over the weekend from a reader:
I own 1000 shares and my original strategy was to sell in May and return when it "possibly" goes back down to $550 (but i doubt it goes that low). However there is a dividend payout coming and possible iTV + iPhone 5 announcements; hence don't want to miss out. What would you suggest i do?
As I tell every person who emails me, I cannot really suggest what you should do. I can only relay what I would do with your position, but under my circumstances. I am unwilling to suggest that this buy or sell or that strategy or this method works across the board in a world flush with so many different types of investors. For this reason, I make options education and basic strategy the focus of my articles and my weekly Options Investing Newsletter, not recommendations.
If I owned 1,000 shares of AAPL, I would certainly be incredibly grateful for the massive share price appreciation I have experienced, assuming I have a favorable cost basis. At this point, however, I would put the very real prospects of further increases on the backburner and initiate a somewhat aggressive options strategy in association with my position.
Here's what I would do, using option prices and AAPL's stock price ($603), as of this past Friday's close.
I would write what a series of staggered covered calls against my shares.
Written Covered Call
Downside protection simply refers to the price AAPL needs to trade below for your covered call trade to become a loser, at least on-paper, prior to expiration. For instance, with AAPL trading at $603, you could sell the stock at that price and be done with it. When you sell the May $600 call and collect $18.25 ($1,825) in premium you protect yourself all the way down to $584.75. In other words, the income you collected when you wrote the call offsets a decline in AAPL's share price down to $584.75.
Of course, you could see your shares called away at any time on a covered call trade, but, to keep things clean for illustration purposes, we'll just assume the party that bought your calls will not exercise his or her option to buy AAPL at the strike price until expiration and at breakeven. Mind you, at expiration, the call owner will, almost definitely, exercise the option if AAPL is in-the-money by $0.01 or more. Brokerages automatically exercise ITM options, unless you, the contract holder, instruct them to do otherwise. I simply show the breakevens to contrast the point at which the call buyer starts making money on the trade with the point where you, the call seller, starts losing money.
Using this strategy, you collect nearly $10,000 worth of income immediately. You keep that cash, less commissions, no matter what happens. Some folks could live off of that with no problem. If the stock drops, so be it. At least you secured yourself some downside protection. It's better than just holding the stock and generating no income other than the forthcoming dividend payment. If your shares get called away - and I highly doubt all 1,000 will on the first go round - you can either move on or write a cash-secured put at a strike price you would be comfortable getting long at again. The latter method brings in even more income.
By the way, that $9,590 in covered call income comes in just shy of the annual dividend you would earn - $10,600 - on 1,000 shares of AAPL. Not a bad strategy at all. It's exactly what I would do if I owned 1,000 shares of AAPL and was sitting on hefty on-paper profits today.