Rolling Apple Protected Covered Calls

| About: Apple Inc. (AAPL)

In a couple of previous articles related to Apple (NASDAQ:AAPL) posted on April 24, 2012 and May 25, 2012, protected covered calls were considered for the company. The protected covered call enables an investor to position an investment for a potential profit, yet be protected in case the stock's price drops significantly.

A protected covered call can be entered by selling a call option against a stock and using some of the proceeds from selling the call option to purchase a put option for protection. The purchased put option acts as "insurance" against a large drop in price. A investor long in Apple on the date of the first article is currently up about +1%. An investor in the Apple protected covered calls mentioned in the previous articles is currently up about +6.2%, as the first protected covered call position returned +4.1% and the second protected covered call position is currently up about +2.1%. The specific call option considered for the protected covered call is the 2012 Jun 570 and the put option is the 2012 Jun 515.

In recent news, Apple is sticking it to Internet search company Google (NASDAQ:GOOG) by removing Google's mapping service as the default for iPhones and iPads. Apple is also hitting Google hard by selecting social networking company Facebook (NASDAQ:FB) as the default for iOS 6.

The price movement of Apple's stock has been phenomenal over the last year as shown below:

However, in the last couple of months Apple's stock price peaked around $650 and has settled into the $575 range.

A significant portion of the 2.6% potential return for the second protected covered call has been realized, so consideration for entering a third protected covered call is given.

Since there's not much value left ($0.03) in the 2012 Jun 515 put option ($0.03), the 2012 Jun 515 put option will be retained for a few more days and potentially rolled at a later date.

Generally, when rolling a protected covered call position, it is best to roll to a call option near the current price of the stock. Since Apple's stock price of $576 is between $575 and $580, consideration is given for rolling the 2012 Jun 570 call option to a 2012 Jul 575 call option and a 2012 Jul 580 call option.

Selecting to buy-to-close the 2012 Jun 570 call option and selling-to-open the 2012 Jul 575 call option has a profit loss chart as shown below:

Rolling to the 2012 575 call option has an aggregate potential return of 6.1% with a maximum potential loss of 5.2%. Rolling to the 2012 580 call option has a slightly higher aggregate potential return of 6.4% and a slightly higher maximum potential loss of 5.6% as shown below:

Since there isn't very much difference between rolling to the 2012 575 call option or the 2012 580 call option, rolling to the 2012 580 call option is selected, as it has a slightly higher potential return, even though the maximum potential loss is slightly higher. The 2012 570 call option can be closed for $7.05 and the 2012 580 call option can be entered for $18.25.

If the price of Apple's stock increases to around $635, then the position can most likely be rolled in order to realize additional potential return.

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