I many aspects I don’t like comparing price changes over various timeframes since they can be cherry picked to prove a point. This is the case for both short-term and long-term comparisons. While one week does not mean Apple’s shares have found a bottom its performance in a very weak market is something to keep in mind.
Selling Puts to generate income
Buying Puts gives the investor to right to sell a stock at a specific price betting that the price of the stock will decline below the Strike Price. Selling a Put means the investor would have to buy the stock at a specific price. A seller of Puts is betting that the stock price will stay above the strike price or above the strike price minus the premium he is paid to sell the Put.
Typically a good time to sell Puts is when a company’s share price is down and the market’s volatility is high generating larger premiums. Except for August last year Apple’s shares haven’t been this low since October 2014 and the previous time the market’s VIX (one measure of the market’s volatility) has been this high was August last year.
If you believe a stock price will stay above the strike price the option will expire worthless and you collect all of the premium. However if the stock price collapses you are forced to buy the stock at the strike price but it can be worth much less. Another downside to selling Puts vs. owning the shares is if the shares go up in value more than what you collect in the premium you lose on the additional upside. You may also have to set aside enough cash in an account to cover the purchase of the shares if the shares fall below the strike price.
I believe you should only sell Puts if you are willing to own the shares at the strike price minus the premium.
Selling Apple Puts
One way to generate income on Apple’s shares is to sell a Put. Depending on how high a rate of return one wants to earn and how much risk one is willing to take an investor can choose how long a time period the option is open and how close to the current price to set the strike price.
A shorter time period and strike price closer to the current price provides a higher rate of return while a longer time period and a strike price farther from the current share price generates a lower rate of return.
Below are four scenarios that generate between a 10% to 21% annualized return:
- June 17, 2016
- Strike price of $90 with a $5.25 premium generates a 14% return
- Breakeven price is $84.75 or 13% below the current stock price
- Strike price of $97.50 with a $8.55 premium generates a 21% return
- Breakeven price is $88.95 or 8% below the current stock price
- January 20, 2017
- Strike price of $90 with a $9.35 premium generates a 10% rate of return
- Breakeven price is $80.65 or 17% below the current stock price
- Strike price of $97.50 with a $12.90 premium generates a 13% rate of return
- Breakeven price is $84.60 or 13% below the current stock price
There are dozens of timeframes between now and next year and strike prices so there are hundreds of choices to choose from on Apple Puts.
One advantage of selling the January 20, 2017, Put is if you wait until a year from now to close the trade I believe the premium would be considered a long-term gain. (Correction: I have been told by a number of people that any option premium income is considered regular income and not long-term gains). If you execute the trade in a tax deferred account than it does not matter what time frame you sell the Put.
Apple’s valuation is very reasonable
In the 10 sell-side models I have seen over the past few weeks their average fiscal 2016 EPS estimate is $9.32 vs. the $9.57 that
Even if Apple’s earnings come in lower than current forecasts by another 10% to 15% if you were to sell Apple Puts and have to buy the shares the valuation of them wouldn’t be much different than what they are currently.
