Barron’s: Time to sell cash-secured Apple puts

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From Steven Sears’ A Better Way to Play Apple Stock’s Surge ($), posted earlier this month:


We have championed this rather boring approach for a long time because it works. Investors simply set aside enough money in their brokerage account to cover the purchase of the associated stock at the pertinent strike price. Then they sell the put. Many investors use this approach to extract higher returns on idle cash, and others regularly use it to get the options market to pay them to buy stocks.

Consider Apple. In late December, Apple’s stock was down about 11% for the year. Worries about weak iPhone sales were rampant. We advised investors to ignore the pessimism and instead sell a cash-secured put to take advantage of the parlor game that Wall Street likes to play with Apple. For a few quarters, or years, the Street bullishly promotes Apple and then bearishly frets that the company is primarily a seller of mobile phones. This inevitably weakens the stock until something happens that reminds investors that Apple might just be more than the iPhone.

When we caught this cycle at the end of last year, Apple’s stock was just under $151. We recommended selling Apple’s July $150 put for about $15. The trade positioned investors to buy Apple stock at close to the 52-week low. Since then, Apple’s stock has surged because the company unveiled plans to redefine how people track their health and interact with paid media. The company is also launching a credit card and getting into the entertainment business.

The stock is now trading around $200, the put we recommended selling is trading around 40 cents, and it’s time to trade again.

Investors can let the July $150 put continue to decay until expiration, or they can cover the position. Either way, Apple’s August $185 put that was recently bid around $5.55 seems attractive. It positions investors to buy the stock at an effective price of $179.45—the strike price less the premium…

The risk of this approach is that something happens that sends Apple’s stock far below the put strike price of $185. This could happen if Apple’s earnings are disappointing, or if the stock market plummets.

While our July $150 put sale worked well, never lose sight of the fact that you may have to buy the stock. So, rather than looking for plump puts with attractive premiums, focus on stocks that you want to own.

My take: Since I’ve never owned or traded Apple, I have nothing to add. Don’t blame me if you drain your IRA doing something you read about here