UPDATE 10:14 AM, April 8: Plugged In Numbers At Bottom Of This Story- Here is another play for Apple. Meant to get this out yesterday but got too tied up so here it is.

It is a covered Call play. Now a lot of you have heard of this, and a lot may not have.

But it is the only way that I will buy an individual stock. It is just something else that you want to add to you bag of tricks.

Ok, so we are going to buy 100 shares of Apple, and since I am writing this on Monday..whoops. at 1:30 AM so it is now Tuesday, but before the market opens I will use the closing numbers for trade.

Going to use the closing prices on these - AAPL 155.89 So let us say we shell out about $15,600 total to make it easy on me.. Therefore, we have $156 as a cost basis. Now of course our goal is always 21.5% ROI per year.

It is probably going to end up opening higher though. We could end up paying $16,000 to be safe. However, I am going to use the example from closing prices.

So, let us see if we can lock in part of that right now.
ast Trade: 155.89
Trade Time: Apr 7
Change: 2.81 (1.84%)
Prev Close: 153.08
Open: 156.19
Bid: N/A
Ask: 159.85 x 1900
1y Target Est: 192.04

Day’s Range: 155.11 - 159.69
52wk Range: 89.60 - 202.96
Volume: 41,395,988
Avg Vol (3m): 48,034,000
Market Cap: 137.01B
P/E (ttm): 34.19

Now we are going to look at selling a July 170 Calls. 170.00 APVGN.X One contract covers 100 shares of stock.
By selling this Call, we give someone the right, not the obligation, to purchase our 100 shares at $170 per share from the time we sell it to up until the option expires in July. Therefore, even if it goes to $175 by then, we have to sell it to them for only $170.

But let’s say we sell the option for the $9.55 it closed at.

That put about $950 bucks in our pocket or we get a return of 6% right up front. Bam, right now. Now the option does not expire for 100 days, so. If we are called out, we make an additional $14 per share for a total return of 14.74% in 100 days or an annualized return of 53.81%. This beats our criteria right?

We could also look at going out to October, but the premium, our amount that we get for the option are not that high for another 90 days really.

Although if we sold the 160’s we could put $1,970 in our pocket right now. That is a 12.6% cash on cash return.

Of course if you purchased the stock on margin, you double that amount. But I am not going there. If you want to do the math, go for it.

If we got called out, that is what it is called when someone buys the stock from us by excercising their option, we would make another $4.75. This would give us a total of $24.46 per share profit or $2,446 or a $15.654% return in roughly 190 days. That would give us an annualized return of 30.07%. Not too bad but the other play make a bit more sense don’t you think?

Although, you do get $19.71 cents back per share right away. How cool is that?

155.00APVJK.X $22.00
160.00APVJL.X $19.71
165.00APVJM.X $17.00
170.00APVJN.X $15.55

What I like to do on these though as in the case with Apple and yes I do expect it to go up although we might see a pull back, is I like to wait for the stock to go up a bit and then sell the calls although you can do a market order on both.

I just put that order in my CBOE account to see what price I get executed on in the morning. You can buy the stock and sell the Call simultaneously.

The July 155 Calls closed at $15.85 and were up to $17.85 by the way and the 190s topped out at $5.10 today before settling down to close at $4.50.

OK, it is way past my bedtime and I want to get this posted. Hopefully my writing is not too bad and you get the beauty of why doing covered calls makes sense. Sure it limits some of your upside but it also put money in your pocket right now and I think it is much safer than just playing a stock by itself. Just think if you wrote calls three or four times a year on just Apple?

Oh yea… if the stock does not get to $170 by July, say it only gets to $165, you won’t get called out and you get to keep the $9.50 per share, or $950 and you could turn around and sell other Calls or just sell the stock and walk away with a great return.

More options details later…. I have a bunch of other goodies coming up for you too.

Cheers,

AA

Here is the update…well it opened a bit down..the pullback that I mentioned.. I got into Apple at $153, about $3 dollars lower than I thought, and we only got $8.25 on the calls. Still not bad. If we get called out we end up making $17,825 for a net of $3,350 or 21.89% in only 100 days for an annual return of 79.91%.

Ta da and that was a market order…. Normally as I said…if the stock is going up and that is normally when you want to purchase it for this exercise, you wait a bit and then sell the calls. But this is a “No Brainer” market order that I did. ANYONE can do this trade and day in and day out beat any returns 99.9999 of the money managers are ever going do for you. You are in control, you can do this. I want you to become wealthy. Life is much more agreeable when you do not have to worry about money.

The reason why I am doing these is because I want to be transparent with you. I want to give you the principles and techniques so the you can do this too. I hope that some of you did at least one of the option trades and you can still do the Apple play right now too. Am I going to be right on my trades all of the time? Nope, but I will be on the vast majority as you will see.

Just a note, equity trades are my least favorite investments and even at these rates of returns are my worst performing. More on my favorite investments later.

The reason I like Apple is that I trust Steven Jobs and his team. I like their products, they are elegant and work well and they sell like crazy and they keep getting better.

Here are the numbers- and I do not include commissions in my numbers for ease of illustration. Plus, they will not change the returns enough to notice.

This entry was posted on Tuesday, April 8th, 2008 at 1:30 am and is filed under 20 Percent Plus Returns, Options, Play Of The Day, Training. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.