Put Selling For Income is my principal investment method. I have a variety of put selling for income strategies I use on various stocks and to a lesser extent on ETFs. In part 1 of this 3 part series I discussed Options Strategies For Income as they pertained to Apple Stock. These three articles on Apple Stock and Options Strategies For Income have come about from an investor who asked for help in creating some simple options strategies for income that he could use with Apple Stock.
In this the second part of this article I am looking at Put Selling for income in Apple Stock. With Apple stock currently trading at $626.00 (August 13 2012), you have to decide what type of investor you are when it comes to put selling for income in Apple Stock. The investor who contacted me advised that he would own Apple Stock if assigned to him as he felt it was good value for the mid to long-term.
While there are many strategies that can be employed for put selling Apple Stock, here are my choices based on the investor who wants to own shares. For those investors who do not want to own shares, these strategies would have to be modified to reduce the risk of assignment more than what I have taken.
Simplest Put Selling For Income Strategy
The simplest put selling for income strategy would be to sell puts at the money which in this case is the Apple Stock $625 put strike. That would be the simplest Put Selling strategy and it is profitable. The September 22 2012 Apple Stock Options for the $625 naked put can be sold for $16.50 at the time of my writing this. That would put the investor in the stock if assigned at $608.50 which is near the $600 I mentioned as support in my first article in this series on Apple Stock. There is nothing wrong with this Put Selling For Income strategy. Select this put selling for income link to review present put option premiums available in Apple Stock.
For investors who want to avoid assignment further, they could consider selling the September 22 2012 Apple Stock $600 put strike which can be sold for $7.50 and provides 1.25% return and a nice support level at $600.
Buy To Close As Apple Stock Rises
As Apple Stock climbs (which is anticipated) the put selling investor would buy to close his naked put positions and keep selling near or just out of the money to continue the put selling for income. As the lower naked puts sold drop in value, the investor should be doing more put selling at higher strikes. As each sold put strike falls in value, buy to close and then move higher with the stock. An investor should also consider using the tools to spot a collapsing stock to keep an eye on the rise in Apple Stock. When that rise begins to erode, that’s the time to buy to close the closer naked puts and wait to sell puts until Apple Stock moves higher once again.
Put Selling For Income Strategy 2
While the above put selling for income strategy is simple and will work for a lot of investors, I like to consider Apple Stock itself. The company paid out a dividend just a few trading sessions ago and based on its earnings it is trading for 14.6 times price to earnings. Meanwhile book value is at $84.25. So what are the chances the stock will break out and move above its April highs. Apple Stock was trading around $400.00 in the fall last year before taking off this spring. This summer it has stayed in a narrow trading range.
If the stock breaks out I would want a piece of that profit.
As a sidenote, when put selling for income I believe there are better stocks than Apple Stock. The primary reason to be Put Selling for income is to generate monthly earnings that are either reinvested or are being used for income while controlling risk of capital loss. If that is the purpose of the Apple Stock put selling for income then it would be better to be selling at the money or just out of the money but realize that if the stock pulls back the risk of assignment is large.
When Put Selling for income I prefer a stock like Johnson and Johnson Stock or Clorox Stock or any of a number of large cap dividend paying stocks. While Apple Stock is paying a decent dividend it is still a company that while widely held and extremely popular, is in a market place that is not extremely diverse.
Johnson and Johnson stock for example represents an incredibly diverse company as does PG stock. Large diversified companies make good choices for monthly Put Selling for income and provide reasonable protection and the ability to apply rescue strategies to turn unprofitable options trades into profitable ones. Apple stock on the other hand could fall $100.00 on bad news or a surprise in earnings. That kind of pullback is hard to rescue. This is why it is important to pick large cap stocks that are reliable for trading patterns when put selling for income. You want to have the stock trade within a range, to make put selling, covered calls and rescue strategies viable month after month.
It is easy to believe you would own shares of Apple Stock if assigned, but how you would feel if the stock from $626.00 to $450.00 in a matter of a couple of months. Would you still want to own the stock?
Back To In The Money Put Selling On Apple Stock
However as the investor wants to proceed with Apple Stock I would be put selling in the money puts for income and profit. Apple Stock is a growth stock at present and I would want some of that growth.
To get some of that profit as the stock rises I would consider selling in the money puts when put selling for income.
To that end as an investor I look at my support level which is $600.00 as seen in the stock above. I then look to see what put options premiums are available for different months, at perhaps the $630 or even $640 put strike, to get my naked puts as close to the $600 valuation as possible.
For example, at the time of writing this article, the September Options for Apple Stock at $640 can be sold for $25.20, while the October can be sold for $32.10 and the November at $42.20.
This means the November at $42.20 provides protection down to just below the $600.00 level which is support for the past 4 months. The return for the investor is 7%, unless he uses margin. If he uses margin and does not ever actually have to use it then the entire trade is profit.
As well should Apple stock rise above $640 and possibly head a lot higher, the investor can easily buy to close early and roll out further, such as January 2013 at the same strike which would generate more income and increase the level of protection in Apple stock to below $600.
Strategy 2 for put selling for income is only slightly more complex than strategy 1. The investor should consider closing each sold put and keep rolling as premium erodes from the closer months. The investor would only move higher when Apple Stock has set a new support level.
In Theory the Put Selling For Income Strategy 2 might look like this:
August 13 2012 – Apple Stock is at $626.00 – Sell 3 of the Oct $640 Naked puts for $32.10. Sell 3 of the Nov $640 Naked Puts for $42.20
August 31 2012 – Apple Stock is at $646.00 – Buy to close the Oct $640 naked puts and sell the January 2013 $640.00 naked puts. Hold the November $640.00 naked puts.
Sept 23 2012 – Apple Stock is at $680.00 – Buy to close the November naked puts and sell the April 2013 $640 naked puts.
Nov 15 2012 – Apple Stock is at $720.oo – The stock has had a couple of pullbacks to $680.00 but has not fallen further. – Buy to close the January 2013 $640.00 and sell the July 2013 $730.00 naked puts.
January 20 2013 – Apple Stock is at $750.00 – Buy to close the April 2013 $640 naked puts and sell the January 2014 $730 naked puts.
You can see that the put strikes being considered are at one time in the money puts and often an investor is selling the same strike as it becomes out of the money. The stock needs to set a support level before moving back to selling in the money such as on November 12 2012. With a growth stock anything can set it back. Should Apple’s products numbers start to fall, the stock could take quite the tumble. An investor has to be prepared to close his naked puts positions if this should end up being the case.
Put Selling For Income Strategy 3
The next method of put selling for income is to spread out the puts being sold. This is one of my favored Put Selling for income methods. It’s because it also spreads out the risks. If for example the investor wanted to do 5 naked puts I would spread each one out differently.
Put Selling For Income Strategy
Here are the strikes and months I would pick as of August 13 2012.
2 September $600 naked put for $7.50
1 October $610 naked put for $18.80
1 November $620 naked put for $31.25
1 January $630 naked put for $47.00
Total income = $11205.00
Capital Required If Assigned on All Shares = $294,795.00
Cost basis of 500 shares = $589.59.
Immediate return 3.8%
One aspect you can see immediately is that the investor is selling naked puts at higher put strikes the further out in time he goes. This is because Apple Stock is considered by the investor a growth stock and the investor wants to earn income as the stock rises. By selling higher put strikes further out in time, he should be capturing more of the rise in the stock. At the same time by having the closer months at lower strikes, if Apple Stock should fall, only the higher strikes are at risk of assignment.
Now add in rolling of the naked put options. I rarely wait for the sold put option to expire on a growth stock. For example by the first week of September the Sept $600 naked puts may be trading for $1.00 or less. I would buy them back and roll out beyond January 2013 into either Feb or March 2013. If the stock is above my January $630 put strike, say perhaps as high as $690, I would be put selling the Feb 2013 $640.00 which will have excellent premiums as I am still in September.
By the end of September the Oct $610 naked put may be trading for $1.50 if the stock is at $690.00. I would buy back the October $610 naked put and sell into March 2013 at $650 which again will have great premiums as I am in late September.
The goal is to keep selling the higher strikes further out in time as long as the investor is convinced that Apple Stock is a growth stock. This strategy if applied properly can earn 20% to 25% annually.
As this is a put selling for income strategy, the investor needs to again use technical tools to watch for any major pullback in the stock. If earnings failed to meet expectations or products shipped numbers fall, Apple Stock could tumble. An investor would want to close his option positions quickly. By spreading out the put strikes being sold, should a tumble occur, normally I have found that if I am assigned it is usually only on the furthest out contracts as they are closest to at the money.
I therefore find that instead of being assigned on 500 shares of Apple Stock, I may be assigned on only 100 shares. This leaves the rest of my capital free to work towards rescuing my 100 shares of Apple Stock and then if the stock is still of interest, repeat strategy number 3.
Put Selling For Income With Margin
A. Margin For The Closest Month
Depending on your tolerance for risk every one of the above 3 strategies could also contain margin use to boost the income earned through put selling for income.
Strategy number 1 is straight forward for margin use, but in strategy 2 and 3 I would use my margin to be Put Selling far out of the money puts at the closest month.
For example the September $550 puts can be sold for $1.70 as of August 13.
If I was using Put Selling for income strategy 3, the Apple Stock total amount committed would be $294,795.00. I would therefore take my marginable amount and sell the September $550 puts for $1.70.
By staying with the nearest month my chance of assignment is greatly reduced and I am put selling far out of the money. I would rarely need to even close these puts unless something dramatic happened either to Apple stock or to the stock market in general.
B. Margin Spread Over Several Months
On the other side of the investment picture are those investors who like to use margin for far out months and far out of the money puts. The further out in time an investor goes, the lower the strike from the present Apple Stock trading value, is sold.
For example, an investor rather than selling the closest months might spread his margin across naked puts in:
Apple Stock presently (Aug 13) trading for $626.00
1 October $550 naked put for $7.85
1 November $525 naked put for $6.90
1 January 2013 $500 naked put for $9.30
1 February 2013 $475 naked put for $9.75
This would add $3380.00 immediately to strategy 3.
In strategy 3 the investor had earned $11205 upon selling his first set of naked puts. By using margin he immediately bumps that amount to $14585. This makes his immediate return 4.9% rather than 3.8%.
Each successive month then, as he keeps rolling his puts, he is also rolling his margin puts augmenting the put selling income earn monthly, while staying far out of the money with his margin use.
Each margin naked put sold is lower from the present stock value, the further out in time the put selling takes place.
As each month draws to a close the investor simply rolls his margin puts further out and lower. This means in October, rolling the Oct $550 to March 2013 at $450.00, and so on.
Each naked put as it expires is rolled further out in time and lower in strike. If Apple Stock should rise to $900.00 by December 2012, then the margin naked puts would be sold at higher strikes but still far out of the money from the $900 value. The goal is to not be assigned and to just add more income to the overall trade. So in strategy 3 while the investor is selling closer to at the money as he goes further out in time with his own capital, he is also selling far out of the money with his margin use further out in time.
Put Selling For Income On Apple Stock Summary
These are three reasonably simple put selling strategies that an investor can use on Apple Stock as it continues to climb in value. In the article I have explained why i would prefer not trading these types of strategies with Apple Stock.
There are other strategies that can be applied to Apple Stocks including iron condors and credit spreads that can result in decent profits as well, however overall I believe other large cap diversified stocks are probably easier to trade and just as profitable if the proper strategies are employed.
The above three put selling for income strategies can be employed to any stock. If they are applied consistently to a diversified large cap stock such as PG Stock, JNJ Stock, MCD Stock, without constantly adjusting positions an investor can be rewarded with annual double-digit returns.
Other Artiles In This 3 Part Series