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Portfolio Overwriting with Apple Computer (NASDAQ: AAPL)

is a covered call writing alternative strategy. Our goals include increasing our returns by a modest amount while still retaining ownership of the shares. Deep out-of-the-money strikes are sold with specific annualized returns in mind, let’s say 6% for purposes of this article.

is a widely held stock by many of our members who look to leverage these securities to generate additional income. In January 2020, had been on a bullish tear with share price rising exponentially:

 

AAPL: 1-Year Chart as of 1/22/2020

 

Portfolio overwriting trade entered 12/24/2019 (1-month return)

  • Buy AAPL at $284.27
  • Sell $315.00 1/24/2020 call at $1.75
  • Goal is an annualized 6% or 0.5% per month return

 

Covered call Writing Calculations with The Ellman Calculator


A 0.6% 1-month time-value return approximates our 0.5% goal with a huge 10.8% upside potential (130% annualized). Selling deep out-of-the-money calls similar to this $315.00 strike will normally have Deltas of <.15, meaning less than a 15% chance of expiring in-the-money. However, as we can see from the chart above, AAPL out-paced even this strike and was trading at $318.60 on expiration Friday (1/24/2020).

 

Trade status 3 PM ET on expiration Friday (1/24/2020)

With AAPL trading at $318.30, the cost-to-close the $315.00 call was $3.50, double the amount we generated from the initial option sale. If we buy-to-close the short call, are we losing money? Heck no!

 

Final trade overview

We maximized our trade as it was initially established with a 0.6% time-value option profit + a 10.8% upside potential for a total 1-month profit of 11.4%. That’s not losing money. Now, if we close, of the $3.50 we pay, $3.30 is intrinsic-value driving the value of our AAPL shares from the $315.00 contract obligation to current market value of $318.30. The actual time-value cost-to-close is $0.20 or 0.06%. We can now write another deep OTM call with a target 0.5% 1-month initial time-value return. On Thursday, AAPL had a favorable earnings release. A critical BCI rule is never to have an option in place that expires after an earnings report. This matter can be circumvented by using Weekly options the month of the report. Avoid the week of the report and then return to Monthlys. If our annualized goal is 6%, our weekly target would be approximately .1%. If AAPL is trading at $400.00, our weekly time-value return goal would be about $0.40. 

 

Discussion

Portfolio overwriting is a covered call writing alternative strategy geared to increasing returns on long-term buy-and hold stocks. Deep out-of-the-money strikes are used with a set target annualized return in mind. Should a strike end up in-the-money as expiration approaches, we can buy-to-close with a miniscule time-value debit.

 

For more information on Portfolio Overwriting

BCI Book

BCI Portfolio Overwriting Calculator

 

Free webinar

I have cancelled all my in-person presentations through the end of the year due to the coronavirus crisis. To keep in touch with our members, we have decided to provide our BCI community with a free webinar in August. Feel free to send in topic ideas and suggestions. Send to: [email protected] 

 

FREE WEBINAR JUST ADDED Thursday August 13th

 

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If you would like to schedule a private webinar with Alan and Barry, send an email to:

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Include:

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Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan and Barry,

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

10 Responses to “Portfolio Overwriting with Apple Computer (NASDAQ: AAPL)”

  1. Dennis August 1, 2020 5:06 pm #

    Alan,

    With the uncertainty of the current market, I am thinking of adding protective puts to my covered call trades. What is the best way to select the strikes for the call and put options?

    Thank you for any help.

    Dennis

    • Marsha August 2, 2020 1:23 am #

      Dennis,

      The way I do it is to select 1 strike higher than current price for the call and 2 strikes lower for the put. I’m looking forward to Alan’s response.

      Good luck,
      Marsha

    • Alan Ellman August 2, 2020 7:05 am #

      Dennis,

      Marsha offers a reasonable formula… calls strikes and put strikes are generally out-of-the-money for collar trades.

      I use strategy goals to craft our strike selections. Let’s say our initial time-value return goal for traditional covered call writing is 2% – 4%. When we add protective puts, that range must be lowered due to the cost of the put, let’s say to 1% – 2%.

      Here’s a hypothetical;:

      With BCI trading at $58.00, the $60.00 call generates $1.50 and the $55.00 put costs $0.75This creates a net option credit of $0.,75, on a cost basis of $58.00, or a 1.3% 1-month return. This meets our hypothetical initial time-value return goal range of 1% – 2%.

      The screenshot below shows the calculations using the BCI Collar Calculator Note that if share price moves up to the $60.,00 strike, there will be a max 1-month return of 4.74%. The max loss is 3.88%

      For more information on the collar strategy:

      https://thebluecollarinvestor.com/minimembership/covered-call-writing-alernative-strategies/

      https://thebluecollarinvestor.com/minimembership/collar-calculator/

      https://thebluecollarinvestor.com/minimembership/video-the-collar-strategy/

      Alan

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

  2. Barry B August 1, 2020 8:51 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 07/31/20.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Since we are starting Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    The BCI team has added additional information, improved the format of our weekly ETF Reports, enhancing the quality of these reports, and making them more user-friendly and time-efficient. Here is a link to a video overview of these new upgrades:

    https://youtu.be/-wgqoyjP5bQ

    On the front page of the Weekly Stock Report, we now display the Top 10 ETFs, the Top 3 SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  3. Tim August 2, 2020 11:05 am #

    Alan,

    If we are avoiding earnings weeks and ex dividend weeks, shouldn’t our are aim should be for higher than 1/2% per month to get to 6% annual? Hope I’m not getting too picky.

    Thanks,
    Tim?

    • Alan Ellman August 3, 2020 5:52 am #

      Tim,

      You are not being too picky at all. If the ex-dates and earnings dates are in different contract months, there will be 8 weeks per year when we are not selling options. This will move our monthly target from 0.5% per month to 0.6% per month or 0.14% per week..

      Alan

  4. Steve H August 2, 2020 1:23 pm #

    Hello Alan,

    I just watched the BCI podcast 15. Very informative. I’d like to incorporate puts to buy stocks at discount.

    How can I use that in conjunction with your BCI weekly reports? Just wondering how your timing works with your reports/ expiration date and writing a put to utilize the PCP approach?

    Thanks in advance and have a great week!

    Regards,
    Steve H

    • Alan Ellman August 3, 2020 5:58 am #

      Steve,

      The same stocks that have passed our rigorous screens that are appropriate for covered call writing are precisely the same securities we use for selling cash-secured puts.

      In our PCP strategy, we sell out-of-the-money cash-secured puts and then follow our exit strategy guidelines. If we allow assignment and accept the shares at a discount, we then write our covered calls in the next contract month., I usually keep all my expiration dates the same unless I turn to Weeklys to circumnavigate earnings dates.

      Alan

  5. Joe August 2, 2020 2:27 pm #

    What a time to write an article about Apple. They just announced their 4 for 1 stock split.

    I have been busy buying back Deep In The Money Covered Calls and selling the shares. Taking the profit early and selling the shares.

    Then buying shares in a new company and selling Covered Calls for more premium.

    I like the idea of being a more long term holder of quality companies. So I am now selling premium out a lot further. 4-6 months. With an eye on making money with the share price increase as well the Covered Call premium.

    The S&P 500 and Nasdaq have seen an almost full recovery, Do you think we are due for another sell off? Or can it climb higher?

    I have also been looking for Deep In The Money Covered Calls I can sell that can still generate 3-5% monthly income, but with a lot more downside protection.

    I do think we are looking at a sell off of some kind in the next few months and would rather make less in premium and have more downside protection.

    • Jay August 2, 2020 5:49 pm #

      Hey Joe,

      If you are new here, welcome, this is a great place to discuss investing ideas!

      I may be similar to you in that I have always found it helpful to have an intermediate market target in mind before deciding specific options strikes and expirations. I think all of your ideas have merit for the months ahead.

      A simple one that used to escape me when I was a bit bearish is to consider building cash reserves when indexes or stocks hit nice high points. Just sell stuff taking profits assuming you are doing all trading in an options cleared IRA and there are no tax issues?

      Then you have the ability to sell cash secured puts against the money if you are right, the market declines some and you can generate a new cash flow even further OTM below price to maybe start adding back again lower after taking profits higher?

      These tools are limited only by our creativity :)! – Jay

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