Wednesday, February 24, 2010

Establish Apple Inc. Covered Call

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of an Apple Inc.(AAPL) covered call as follows:

Established Apple Inc.(AAPL) Covered Call for Mar2010:
02/24/2010 Bought 100 AAPL @ $198.677
02/24/2010 Sold 1 AAPL Mar2010 $210.00 Call @ $1.57

Apple Inc. designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players, as well as sells various related software, services, peripherals, and networking solutions.
The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers. In addition, it sells various third-party Macintosh, iPhone, and iPod and now iPad compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores, and digital content and applications through the iTunes Store. The company sells its products to consumer, small and mid-sized business, education, enterprise, government, and creative customers. The company, formerly known as Apple Computer, Inc., was founded in 1976 and is headquartered in Cupertino, California.

The Buy Alerts spreadsheet below shows that Apple exceeds the Covered Calls Advisor's desired "Buy" rating threshold of 20.0 with a Total Points of 21.16.
With the launch of the iPad and the current impressive momentum of both the iPhone and the Mac, at its current price below $200, this high-growth company has become very appealing using this advisor's value-oriented metrics. Because of Apple's $24+ billion in cash and no long-term debt, the enterprise value of AAPL is $155.4 billion which calculates to a P/E ratio of only 14.5 based on this year's expected earnings of about $11.80 per share. This Ex-Cash P/E ratio is likely to expand as Apple continues to grow via its leadership position in the burgeoning mobile internet markets worldwide.

Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for the AAPL transactions would be as follows:
Stock Purchase Cost: $19,876.65
= ($198.677*100+$8.95 commission)

Net Profit:
(a) Options Income: +$147.30
= (100*$1.57 - $9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $198.677):
-$8.95 = ($198.677-$198.677)*100 - $8.95 commissions
(c) Capital Appreciation (If exercised at $210.00): +$1,123.35
= ($210.00-$198.677)*100 - $8.95 commissions

Total Net Profit(If stock price unchanged at $198.677): +$138.35
= (+$147.30 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $210.00): +$1,270.65
= (+$147.30 +$0.00 +$1,123.35)

Absolute Return if Unchanged at $198.677: +0.7%
= +$138.35/$19,876.65
Annualized Return If Unchanged (ARIU) +10.6%
= (+$138.35/$19,876.65)*(365/24 days)

Absolute Return if Exercised at $210.00: +6.4%
= +$1,270.65/$19,876.65
Annualized Return If Exercised (ARIE) +97.2%
= (+$1,270.65/$19,876.65)*(365/24 days)


  1. Big Fan of your blog. This is a weird position it seems as the covered call income is so tiny. It seems as though you would be better off simply buying the stock and leaving it uncovered.

  2. Anonymous,

    On the one hand, your observation is correct since this position is further out-of-the-money than most. On the other hand, the covered call position will be more profitable than the basic buy the stock alternative you mentioned unless the stock has a big bullish move and closes above $111.57=($110.00+$1.57)on March 19, 2010(expiration Friday). And the probability of such a bullish move over the next 24 calendar days is only approximately 20%; so there is an 80% likelihood that the AAPL covered call will have a better outcome than simply buying the AAPL stock. Make sense?

    Also, I agree with you that the $138.35 (net after commissions) income received from selling the call option is not very substantial. If it had been less than $100, then it would have been below my minimum threshold and I would not have established this covered call.

    I hope these comments are helpful.


  3. Morgan Stanley issued today a positive research tactical idea on Apple. Here is an interesting summary via Notable Calls:


  4. Jeff I understand buying apple, but you mean $210 not $110 -- just seems that if you're gonna be buying apple here you might have just left it uncovered.

  5. I guess I was just trying to say getting 1/2% for a 5% out of the money apple call doesn't seem to be worth it based on apple's actual volatility.

  6. Jeff looking for some advice on a covered call play i did. I bought 10,000 shares of C at 3.43. Sold covered calls on 3000 shares at the January 2011 4.00 for 0.37.

    As far as the uncovered part I can manage them myself.

    As far as the covered portion of the deal the Jan 11 4.00 are now 0.70.... and the Jan 11 5.00 are now 0.36 while the Jun 10 4.00 are now 0.40. Any suggestions of how you would play this covered call? thx