Monday, August 22, 2011

Establish Apple Inc.(AAPL) 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 Sep2011:
    08/22/2011 Bought 100 AAPL @ $359.986
    08/22/2011 Sold 1 AAPL Sep2011 $375.00 Call @ $8.45
    Note: The call option was sold today when the AAPL stock was trading at $361.52.

    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. It sells to consumers, small and mid-sized businesses, education, enterprise, government, and creative customers. The company, formerly known as Apple Computer, Inc., was founded in 1976 and is headquartered in Cupertino, California.

    Apple is hitting on all cylinders with its: (1) ongoing growth of Macs, iPhones, and iPads:

    (2) accelerating growth in iPads and iPad applications; and
    (3) exciting new initiatives with:

  • iCloud beginning later this year; and

  • A potential iPhone deal to begin distribution via China Mobile in 2012 (who currently has over 600 million existing customers in China); and

  • Possibility of iTV as early as 2012.

Apple Inc. rates as a strong buy on the Covered Calls Advisor's Buy Alerts spreadsheet (see below) with an overall rating of 18.94, well above the Buy Alert threshold of 16.0. In terms of valuation, the current P/E Ratio is only 13 based on FY11 (which ends in Sept 2011)estimated earnings per share of $27.50. FY12 earnings are likely to grow another 27% to approximately $35.00 per share. Based on this expectation, a one-year target price of $500 is reasonable, which would be a 39% increase above the $360 purchase price today.

Note: Click on chart above for larger image.

Some possible overall performance results(including commissions) for the AAPL transactions would be as follows:
Stock Purchase Cost: $36,007.55
= ($359.986*100+$8.95 commission)

Net Profit:
(a) Options Income: +$835.30
= (100*$8.45 - $9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $359.986):
-$8.95 = ($359.986-$359.986)*100 - $8.95 commissions
(c) Capital Appreciation (If exercised at $375.00): +$1,492.45
= ($375.00-$359.986)*100 - $8.95 commissions

Total Net Profit(If stock price unchanged at $359.986): +$826.35
= (+$835.30 +$0.00 -$8.95)
Total Net Profit(If stock assigned at $375.00): +$2,327.75
= (+$835.30 +$0.00 +$1,492.45)

Absolute Return if Unchanged at $359.986: +2.3%
= +$826.35/$36,007.55
Annualized Return If Unchanged (ARIU) +32.2%
= (+$826.35/$36,007.55)*(365/26 days)

Absolute Return if Assigned at $375.00: +6.5%
= +$2,327.75/$36,007.55
Annualized Return If Assigned (ARIA): +90.8%
= (+$2,327.75/$36,007.55)*(365/26 days)


  1. Hello Jeff

    If the buyer of the call option excersies the option will you get back your original investment of 36K less fees?

    Sorry if this answer is obvious.

    Thank You

  2. Ron,

    The call owner has the right to buy Apple from me at the agreed upon strike price of $375.00 anytime prior to expiration, so I would actually make a profit on both the original options income received and also the capital appreciation from $36,000 to the $37,500 less commissions that I would receive when assigned. Normally, the stock is not exercised prior to expiration since it is less costly for the options owner to simply sell the option rather than exercise it -- this is because of the time value (aka extrinsic value) remaining in the option prior to the expiration date.