There is a lot of hype around the launch of the iPhone 5 and speculation on its release date. The company has finally sent out press invites for 12 September for a product launch. Apple (AAPL) has a history of keeping its launches a secret. This effective marketing strategy always creates a lot of buzz around the launch of their products and Apple has a solid record when it comes to living up to these expectations. However, the hype also causes a case of missed expectations. People are expecting a lot from the launch of the iPhone 5. We have already discussed strategies for making money on the iPhone launch.
We believe investors can also use options to generate income and hedge against any iPhone 5 fallout. Different strategies such as Covered Calls, Covered Strangles and calls can be used to generate income and a hedge. If we look at the open interest on Apple options, we see an increase on a YoY basis. Due to this liquidity in AAPL options, investors can earn approximately a 8.8% yield using covered strangles. We discuss this strategy in-depth below.
Call Options
We will first discuss profits that we can make using call options for September and October. The table below shows Call options expiring in September.
Current Price AAPL: $673
Strike | Ticker | Ask | Last | IVM | DM | Volm | OInt |
655 | AAPL 9/22/12 C655 | 28.15 | 28 | 27.74 | 0.71 | 1441 | 4715 |
660 | AAPL 9/22/12 C660 | 24.75 | 24.6 | 28.26 | 0.64 | 5702 | 16128 |
665 | AAPL 9/22/12 C665 | 21.55 | 21.5 | 28.11 | 0.6 | 6628 | 6926 |
670 | AAPL 9/22/12 C670 | 18.65 | 18.55 | 27.85 | 0.55 | 11969 | 14886 |
675 | AAPL 9/22/12 C675 | 16 | 15.95 | 27.73 | 0.5 | 9745 | 9121 |
680 | AAPL 9/22/12 C680 | 13.55 | 13.5 | 27.5 | 0.45 | 8227 | 12214 |
685 | AAPL 9/22/12 C685 | 11.45 | 11.5 | 27.35 | 0.4 | 3967 | 5477 |
690 | AAPL 9/22/12 C690 | 9.6 | 9.58 | 27.36 | 0.36 | 4613 | 13033 |
695 | AAPL 9/22/12 C695 | 7.95 | 7.93 | 27.16 | 0.32 | 2530 | 6666 |
Source: Bloomberg
Taking a position in different available call options can give you the following returns per contract, under the said scenarios.
Current Price AAPL: $673.74
Strike | Ticker | Ask | OInt | 675 | 700 | 710 | 725 |
655 | AAPL 9/22/12 C655 | 28.15 | 4715 | -29% | 60% | 95% | 149% |
660 | AAPL 9/22/12 C660 | 24.75 | 16128 | -39% | 62% | 102% | 163% |
665 | AAPL 9/22/12 C665 | 21.55 | 6926 | -54% | 62% | 109% | 178% |
670 | AAPL 9/22/12 C670 | 18.65 | 14886 | -73% | 61% | 114% | 195% |
675 | AAPL 9/22/12 C675 | 16 | 9121 | -100% | 56% | 119% | 213% |
680 | AAPL 9/22/12 C680 | 13.55 | 12214 | -100% | 48% | 121% | 232% |
685 | AAPL 9/22/12 C685 | 11.45 | 5477 | -100% | 31% | 118% | 249% |
690 | AAPL 9/22/12 C690 | 9.6 | 13033 | -100% | 4% | 108% | 265% |
695 | AAPL 9/22/12 C695 | 7.95 | 6666 | -100% | -37% | 89% | 277% |
An option strategy for options expiring in October will give the following possible returns per contract.
Strike | Ticker | Ask | OInt | 675 | 700 | 710 | 725 |
655 | AAPL 10/20/12 C655 | 38.45 | 5754 | -48% | 17% | 43% | 82% |
660 | AAPL 10/20/12 C660 | 35.35 | 7920 | -58% | 13% | 41% | 84% |
665 | AAPL 10/20/12 C665 | 32.45 | 5525 | -69% | 8% | 39% | 85% |
670 | AAPL 10/20/12 C670 | 29.65 | 10844 | -83% | 1% | 35% | 85% |
675 | AAPL 10/20/12 C675 | 27 | 5019 | -100% | -7% | 30% | 85% |
680 | AAPL 10/20/12 C680 | 24.55 | 14492 | -100% | -19% | 22% | 83% |
685 | AAPL 10/20/12 C685 | 22.25 | 2487 | -100% | -33% | 12% | 80% |
690 | AAPL 10/20/12 C690 | 20.1 | 9555 | -100% | -50% | 0% | 74% |
695 | AAPL 10/20/12 C695 | 18.1 | 3021 | -100% | -72% | -17% | 66% |
As can be seen, the profit margins are higher in September options in the given price range. We recommend the following options for each month:
September | October |
AAPL 9/22/12 C660 | AAPL 10/20/12 C670 |
AAPL 9/22/12 C665 | AAPL 10/20/12 C665 |
Covered Calls
Investors who are long AAPL can increase their profits by selling call options on their underlying security. The primary profit from such a position would be the premium received by selling the option, and the loss would be the opportunity cost in case of a price increase in AAPL. This means that as we have already promised to sell the underlying security owned by us, we will not earn any profits by an appreciation in the stock price above the strike price. The following table shows returns for October and September for such a position.
September Returns
Strike | Ticker | Bid | OInt | $625 | $650 | $675 | $700 | $710 | $725 |
655 | AAPL 9/22/12 C655 | 27.8 | 4715 | 27.8 | 27.8 | 7.8 | -17.2 | -27.2 | -42.2 |
660 | AAPL 9/22/12 C660 | 24.55 | 16128 | 24.55 | 24.55 | 9.55 | -15.45 | -25.45 | -40.45 |
665 | AAPL 9/22/12 C665 | 21.25 | 6926 | 21.25 | 21.25 | 11.25 | -13.75 | -23.75 | -38.75 |
670 | AAPL 9/22/12 C670 | 18.35 | 14886 | 18.35 | 18.35 | 13.35 | -11.65 | -21.65 | -36.65 |
675 | AAPL 9/22/12 C675 | 15.85 | 9121 | 15.85 | 15.85 | 15.85 | -9.15 | -19.15 | -34.15 |
680 | AAPL 9/22/12 C680 | 13.35 | 12214 | 13.35 | 13.35 | 18.35 | -6.65 | -16.65 | -31.65 |
685 | AAPL 9/22/12 C685 | 11.25 | 5477 | 11.25 | 11.25 | 21.25 | -3.75 | -13.75 | -28.75 |
690 | AAPL 9/22/12 C690 | 9.4 | 13033 | 9.4 | 9.4 | 24.4 | -0.6 | -10.6 | -25.6 |
695 | AAPL 9/22/12 C695 | 7.8 | 6666 | 7.8 | 7.8 | 27.8 | 2.8 | -7.2 | -22.2 |
October Returns
Strike | Ticker | Bid | OInt | $625 | $650 | $675 | $700 | $710 | $725 |
655 | AAPL 10/20/12 C655 | 37.95 | 5754 | 37.95 | 37.95 | 17.95 | -7.05 | -17.05 | -32.05 |
660 | AAPL 10/20/12 C660 | 34.9 | 7920 | 34.9 | 34.9 | 19.9 | -5.1 | -15.1 | -30.1 |
665 | AAPL 10/20/12 C665 | 32.1 | 5525 | 32.1 | 32.1 | 22.1 | -2.9 | -12.9 | -27.9 |
670 | AAPL 10/20/12 C670 | 29.5 | 10844 | 29.5 | 29.5 | 24.5 | -0.5 | -10.5 | -25.5 |
675 | AAPL 10/20/12 C675 | 26.65 | 5019 | 26.65 | 26.65 | 26.65 | 1.65 | -8.35 | -23.35 |
680 | AAPL 10/20/12 C680 | 24.2 | 14492 | 24.2 | 24.2 | 29.2 | 4.2 | -5.8 | -20.8 |
685 | AAPL 10/20/12 C685 | 22 | 2487 | 22 | 22 | 32 | 7 | -3 | -18 |
690 | AAPL 10/20/12 C690 | 19.9 | 9555 | 19.9 | 19.9 | 34.9 | 9.9 | -0.1 | -15.1 |
695 | AAPL 10/20/12 C695 | 17.8 | 3021 | 17.8 | 17.8 | 37.8 | 12.8 | 2.8 | -12.2 |
As the table shows, the returns in this case are the dollar returns gained by selling the option. The losses represent the unrealized losses. As the seller of the option already owns the stock, there will be no material loss. Covered calls with strike prices of $670 and $675 can be used for both months to hedge against a possible decline in AAPL's price, and potentially earn a profit at the same time. We are bullish on AAPL and believe that stock prices will move up after the iPhone 5 launch. Therefore, we believe these covered calls can be used to make a profit.
Covered Strangle For a 8.8% Dividend Yield
Covered Strangles can be used to earn profits on securities in your portfolio. For companies with a high dividend yield, the dividends provide investors with a regular stream of income. With the stock offering a low dividend yield, long term investors have to find other ways to generate a dividend stream. We have already discussed what returns can be earned by a covered call, and adding a put option to a covered call portfolio would give you a covered strangle. We will use the data for Call and Put options taken from Bloomberg. We will sell out of money call and put options on AAPL for January 13 for our Covered Strangle. As we are bullish on AAPL, we will recommend selling a put option with a strike price of $630, and call options with a strike price of $720.
Put Option Bid (630) | $30.7 |
Call Option Bid (720) | $28.75 |
Total Premium Earned | $ 59.45 |
AAPL's price increase beyond $720 | The holder of call option will exercise. Our gain would be the option premium received and the difference between current price and $720 |
The price remains between $630 and $720 | The options wont be exercised and we will get premium |
The price falls below $630 | The put holder would exercise its put. Our loss would be the difference between current price and 630. But it will be covered by the option premium received |
Our return in most likely scenario would be $59.45/673= 8.8%. We believe investors can earn a stable dividend using this strategy to increase their income from Apple if they intend to hold the stock in the long run. Similar covered strangle can be leveraged as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
