By Robert Hauver
Apple still isn’t part of the dividend stocks universe, in spite of its shareholders’ ramped up demands for the company to pay out some of its huge $51 billion cash pile as dividends. However, there’s an effective, lucrative strategy that we’ve often used, via which you can earn a higher yield on AAPL than on most high dividend stocks.
If you had been able to buy AAPL at $291.60 in 2011, would you have taken that risk? How about $302.50? As AAPL’s 52-week range is $310.50 to $426.70, both prices would have been quite profitable. AAPL has been one of best stocks to buy in 2011 for price gains, having risen 23.56% year-to-date.
But if you’re an income investor, not a trader, and AAPL still doesn’t pay dividends, what can you do?
Solution: Create your own “dividend” from Apple via selling cash secured put options below the current stock price, to give yourself the most desirable combo of a lower break-even and highest yield. Even Even though AAPL doesn’t currently pay dividends, we’ll show you below that it does have high options yields which can be very lucrative. The trade-off to manage is that the lower strike price you sell the put options at, the lower your break-even should be, but the lower your yield is.
(Note: You can see more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Here are 2 examples of 2011 AAPL put-selling trades:
1. Jan. 2011 Cash Secured Put Selling Trade:
On Jan. 18, 2011, we sold Jan. 2012 $330.00 cash secured puts for $38.40, creating a break-even of $291.60. These put options are worth only $.44 each at the time of this writing.
AAPL closed at $340.65 the day of this first trade, and had a 200-day moving avg. of $280.87, and a 50-day moving avg. of $322.64.
Our break-even of $291.60 was 3.82% above AAPL’s 200-day avg., and 9.62% below its 50-day avg.
2. Oct. 2011 Cash Secured Put Selling Trade:
On Oct. 4, 2011, we sold July $345.00 cash secured puts for $42.50, creating a break-even of $302.50. These put options are worth only $19.15 each at the time of this writing.
AAPL traded for $372.50 the day of this trade. Its 200-day moving average was $350.55, and its 50-day moving average was $382.55.
Our $302.50 break-even was far below both the long and short-term avgs: 14.27% below the 200-day avg. and 20.9% below the 50-day avg.
Our Oct. trade was certainly aided by the much higher market volatility present then, as the VIX “fear factor” hit a high of 46.88 the day we made our Oct. trade, vs. its 15.87 close when we made our Jan. trade.
This much higher volatility allowed us to sell put options at a strike price much further “out of the money” in Oct., ($27.50 below AAPL’s Oct. 4th price), vs. selling only $10 below AAPL’s Jan. 18th price.
Timing: In hindsight, the January 2011 trade was a riskier one, even though the break-even was lower, for a couple of reasons:
1. Our break-even was above AAPL’s 200-day average.
2. AAPL had not entered the oversold region yet. You can see at the far left on the stochastic chart below, (bottom chart), that although we placed the Jan. trade just a few days before AAPL bottomed out at a $326 level, it wasn’t until late Feb. that AAPL entered the oversold low point on the chart:
We made the Oct. trade when AAPL hit an oversold “valley” on the stochastic chart, and this better timing has played out thus far in accelerating the profit in this trade.
Here’s how the 2 trades compare in amount of total profit realized over roughly similar time periods. The Jan. trade only realized 20.80% of its potential profit in 72 days, while the Oct. trade has realized nearly 55% of its profit in 79 days:
The lesson from these 2 trades is to try to wait for oversold conditions before selling cash secured puts. All other things being equal, this should help you to realize your potential profit sooner, and should also improve your cash flow. This is another example of the old Buffett saying, “Be greedy when others are fearful, and fearful when others are greedy”. In other words, some of your most profitable opportunities will emerge when the market looks bleak. We made the Oct. trade on the heels of the -9.79% Sept. pullback, when US economic data was less rosy, and the European crisis was dominating the news – all in all, a rather dark atmosphere…
What action to take now: Keep this idea in your back pocket and wait. AAPL is currently overbought on the stochastic chart, so wait for the next market downturn, and keep an eye on AAPL’s charts to see when it hits a “valley” low point at 20 or below on its stochastic chart. Volatility has subsided somewhat, but it’ll most likely return soon enough in 2012, given all of the current domestic and global economic and political issues in the news.
To walk through the details and mechanics of a cash secured put trade, please see this article: 2 High Yield Strategies For Hedging Dow Dividend Stocks, which also illustrates a covered call options trade.
The Covered Calls trades discussed in our other recent articles are listed in our Covered Calls Table.
Disclosure: Author is short puts of AAPL.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved