Protected Covered Call For Apple

| About: Apple Inc. (AAPL)

In a previous article related to Apple (NASDAQ:AAPL) posted on April 24, 2012, Apple popped up as the highest returning protected covered for a search using our tools. The protected covered call was considered as Apple's earnings were about to be released. 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. A long investor in Apple on the date of the previous article is currently up about 0.2%, as compared to the 4.1% return for the protected covered call considered previously.

In Apple's Q2 2012 conference call held on April 24, 2012, the company reported fantastic results, and the company's stock price initially spiked up but then swooned as shown below:

The swoon in stock price was probably partially due to the overall market's negativity, but the company indicated in the conference call that they expect a sequential decline in iPhone sales. The company gave five factors for the expected sequential decline: 1) iPhone inventory changes, 2) fabulous iPhone 4S execution, 3) fabulous execution for new iPad, 4) decreased entry price for iPad to $399 and 5) U.S. dollar strengthening. It appears Apple is expecting some the sales of iPad to cannibalize sales of the iPhone so instead of selling a customer an iPhone, the customer is sold an iPad.

Outside of the potential sequential decline in iPhone sales, the quarterly growth rates were phenomenal across the board. Quarterly revenue growth as compared to the prior year was 59%. iTunes had 35% year-over-year quarter growth, iPhones 88% and iPads 151%. Apple retail stores grew 38% quarterly year-over-year and opened two new stores. The first store in the Netherlands was opened in Amsterdam. And the company opened a new store in Houston and has a total of 363 retail stores. Gross margins were improved by 540 basis points to 47.4% with a significant amount of the gross margin improvement attributed to lower than expected commodity costs and other costs. Additionally, Apple indicated the company is planning on announcing a $2.65 per share dividend in the near future.

Apple is flying high, which is cool, but with the volatility in Europe related to sovereign debt, an investor in the company might want to tread carefully. While not having the highest returning protected covered call, a protected covered call for Apple can be entered for a potential return of 2.6% with a maximum potential loss of 7.3%, so even if the price of the stock drops to zero, the maximum potential loss is 7.3%. Some of the available protected covered call positions are shown below:

The specific call option to sell is the 2012 Jun 570 at $18.00 and the put option to purchase is the 2012 515 at $2.81. A profit/loss graph for one contract of the protected covered call is shown below:

For a stock price below the $515 strike price of the put option, the value of the protected covered call remains unchanged (at expiration). If the price of Apple's stock increases to around $630, the position can most likely be rolled 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.

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