Tech Dividend Stocks With High Options Yields

by Robert Hauver
Who are the winners so far in 2017? We looked at sectors from a variety of angles – trailing valuations, future earnings valuations, dividend yield, and performance, to see which sectors have outperformed, and which ones hold the most promise for the future.

Not surprisingly, Tech was a clear winner in Performance- it leads all other sectors so far in 2017:

Click here to read more…

How To Buy Apple Below The Market And Earn High Options Yields

By Robert Hauver

Apple, (AAPL), has been much more volatile ever since the US Dept. of Justice announced an investigation into possible e-book price fixing, dropping from its high of $644.00 down to a $572.98 close this week. Adding to the volatility is the anticipation for AAPL’s next quarterly earnings report, scheduled for Tuesday, April 25th.

AAPL has reported spectacular earnings growth over the past 4 quarters, and has surprised to the upside in the “Earnings Surprise” game in 3 of the past 4 quarters. The table below shows the Post-Earnings Share Price changes on the day following each earnings report.

AAPL’s “stumble” in mid – Oct. 2011, when it reported a mere 52% EPS growth and missed inflated analyst expectations, happened during last fall’s high volatility period. The share price only fell -5.59% the day after earnings, but fell from $422.24 to a low of $363.57, (a 13.90% drawdown). during the Nov. market pullback, finally recovering on Jan. 6, 2012, and is currently approx. 36% above its Oct. 18, 2011 price, as of 4/20/12:

AAPL-EARN SURPRISE

After AAPL’s stellar Q1 Fiscal Year report, analysts have kept raising earnings estimates for next Tuesday’s report, with growth forecasts that leave AAPL’s mega-cap peers in the dust.  Looking at AAPL’s past quarterly EPS growth numbers, though, one can hardly blame them for getting so excited.

With estimates and expectations so high, one wonders if AAPL can possibly avoid “disappointing” analysts next Tuesday, while still turning in strong growth figures? Moreover, how will the market react?:

AAPL-Q2-2012 CONSENSUS

So, how can you profit from AAPL’s current volatility and 12.6% pullback?  The prudent approach is probably to wait for next Tuesday’s results and market reaction, but what if AAPL blows out its earnings once again, and soars out of reach?

Fortunately, AAPL has rather high options yields, so, a conservative way to profit in this situation, even if AAPL soars, is to sell cash secured puts below AAPL’s share price, which, of course, is a rapidly moving target. Conversely, if the market is disappointed with AAPL’s report, and its price declines, its put option premiums will rise, including those on the many other strike prices below these put options, resulting in even lower break-even points.

You could sell puts at an even lower strike price in that scenario. As usual, you’ll get paid the put premium price within 3 days of making the trade.

There are 2 variables to this approach – Expiration Month and Strike Price. Here are some examples of the current put options payouts for 2 different put option strike prices that expire in August. Lower strike prices offer lower put premium payouts, but also have lower break-even prices.  The key here is to find a strike price far enough below AAPL’s stock price that achieves the balance between your risk tolerance and your target option income:

AAPL-PUTSTRIKES

There are more details on these and over 30 other Cash Secured Puts trades with high options yields in our Cash Secured Puts Table.)

The next table has examples of the current put options payouts for various expiration months, using the same put option strike price of $580.00. Put premiums are higher for longer expiration dates, which gives you a lower break-even, but a lower annualized yield, due to the longer time period. Again, the more conservative approach is to sell at strike prices further below AAPL’s strike price.

AAPL-PUTMONTHS

AAPL is due to join the ranks of dividend paying stocks sometime in the July-Sept. 2012 quarter, but hasn’t announced its ex-dividend date yet. (Note: Put sellers don’t receive dividends, we list dividends here for comparison only.):

Disclosure: Author is short Apple put options.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

2 Ways To Hedge Your 2012 Apple Gains

By Robert Hauver

Could this be true? Apple fell on a big “up” market day Thursday, and is negative for the week so far, (-.05%).  Is the game changing, or is AAPL just taking a breather, as investors get a little skittish from a government E-book price fixing probe?

As you most likely know, AAPL has been one of the best stocks to buy for price gains year-to-date, and over the past year.  However, it slowed down its torrid pace in March, gaining 10.53%, vs. it 18.83% gain in February, and is up just 3.74% so far in April.

The mere fact that we’re calling a 10%-plus monthly gain a “slowdown” seems absurd, and illustrates just how well AAPL has performed, and how much the market has come to expect it to perform. But maybe it’s time to hedge your 2012 gains, with AAPL up almost 54% year-to-date, and up 100% from its 52-week low:

AAPL-PERF

AAPL-BETA

If you’d had the prescience to buy AAPL on its way up, you may be wondering which is the best way to hedge your gains. There are numerous ways to hedge, but selling covered calls is an options trading strategy that will create some immediate income for you, and also hedge some of your gains.

Below are two approaches to selling covered calls:

1. Longer Expirations: By selling call options further out in time, you’ll earn more call premium $, and achieve a lower break-even price. In the examples below, we’ve used AAPL’s opening price for 2012 as our cost, in order to show how much of 2012’s gains you can hedge by selling covered calls with various expiration dates:

AAPL-CALLS-TIME

As you sell calls at expiration months further out in time, your call premiums increase – the Jan. 2013 $625.00 call pays $76.10, and hedges over 35% of the year-to-date gain, vs. a $52.45 call premium for the nearer August call, which hedges approx. 25% of the gain.

Tradeoff: Your break-even cost of $328.00 is also lower with the higher Jan. 2013 call option premium, vs. $354.30 for the August expiration.  However, your annualized yield is lower, since it’s a 9-month trade, vs. only 4 months for the Aug. 2012 trade.  (As we don’t yet know what AAPL’s ex-dividend date will be for the 3rd and 4th quarter, we’ve speculated that it might fall before the August expiration. However, it would certainly fall before the Oct. 2012 expiration, and you’d receive 2 quarterly dividends with the Jan. 2013 trade.)

(You can see additional details for over 30 other high options yields trades in our Covered Calls Table.)

2. Higher Strike Prices: A more bullish approach would be to sell covered call options at a higher strike price, in order to leave more room for future potential price gains. If you think that AAPL has more room to run, you could sell covered calls at strike prices higher than AAPL’s current strike price. We used AAPL’s 4/12/22 price of $622.50 for this example, which shows the range of call option payouts you’d receive for 3 different Jan. 2013 strike prices.

Tradeoff: All 3 strike prices are above AAPL’s current price, but as you sell at higher call strike prices, you’ll receive less premium. However, the Jan. 2012 $640.00 call strike price leaves you $17.50/share in potential assigned price gains, vs. only $7.50/share for the Jan. $630.00 strike price.  As usual, the more call premium $ you receive, the lower your break-even is:

AAPL-STRIKES

Dividends: Apple announced in March that it will be entering the world of dividend stocks sometime in the July-Sept. 2012 quarter, paying $2.65/share quarterly.  Market commentators have increasingly compared AAPL, with its huge cash hoard, to other Tech dividend paying stocks, clamoring for a dividend payout.  CEO Tim Cook took their advice, and also instituted a 3-year $10 billion stock buyback plan that starts in October, which will mitigate the effect of employee stock option dilution of shares.

AAPL-DIVS

Valuations: AAPL’s PEG ratio might turn out to be much lower than 1.25, since they’ve exceeded earnings estimates handily for the past  3 out of 4 quarters.  Consider this: AAPL earned $27.68/share in its last fiscal year, which ended 9/30/12, and has already earned $13.87 in its first fiscal quarter, which ended 12/31/12. Since it’s already earned 50% of its past fiscal year’s profit in one quarter, it seems a reasonable bet that AAPL can grow its next fiscal year earnings by a lot more than 14.31%.

By the way, AAPL is also one of only 4 large cap stocks with 40%-plus sales growth over the past 5 years. Just imagine – they grew their sales over 41% through the Great Recession – what an accomplishment! So, the biggest market cap stock in the world is also a growth stock:

AAPL-PEG

Financials: AAPL’s Mgt. ratios and operating margin far outshines industry avgs., and it has no debt:

AAPL-ROE

If you haven’t gotten on board the AAPL bandwagon, any upcoming pullbacks may offer you a chance to do so. In our next article, we’ll detail a lucrative way to sneak up on this stellar stock.

Disclosure: Author is short Apple put options.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

An Easy Strategy For Hedging 2011 Apple Gains

By Robert Hauver

If you were blessed with enough foresight to buy AAPL earlier in 2011 when it dipped, you probably have a profitable unrealized gain right now.  Once again, Apple was one of the best stocks to buy this year for price gains, rising over 24%, from $325.64, to approx. $405.12, as of 12/29/11.

Even though Apple doesn’t currently pay dividends, and isn’t normally part of our coverage of dividend stocks, in last week’s article we wrote about a lucrative, conservative strategy you can use to create your own AAPL dividend that has a higher yield than many high dividend stocks do.

This week’s article details one more way you can create decent income from Apple, and/or, if you now own AAPL shares, you could lock in a good % of 2011’s price gains. With so much uncertainty ahead in 2012 – a US presidential election, ongoing Eurozone debt problems, etc., many forecasters are predicting another volatile year in the market.

Selling Covered Calls is a strategy for hedging some of your downside risk on a stock, that offers you immediate income, and also has tax deferral advantages.  Since you only pay taxes on your options gains for the tax year in which the option expires or is closed out, you can often get tax-deferred use of your option income for 1-2 years.

For example, suppose on Jan. 3, 2012, you sell AAPL call options that expire in Jan. 2013. You get paid the call premium within 3 days of the sale, but you don’t have to report this income and pay taxes on it until April 2014, if you let it expire in Jan. 2013.

You can see more info on over 30 high yield Covered Calls trades discussed in our other recent articles in our Covered Calls Table.

Some of the key decisions to make when selling covered call options are:

1. How far out in time to sell covered calls – Generally, the further out in time you sell, the higher the premium, due to the time value of the options.  The trade-off, however, is the additional uncertainty of going further out into the future. Currently, there are AAPL options available in 2012-Jan, Feb, March, April, and Oct.; Jan 2013; and Jan 2014.  AAPL usually has high options yields and strong volume/liquidity, and there are many options to choose from.

This table below compares the current expiration months, using the same $410.00 strike price, with AAPL’s 12/29/11 price as a cost basis.

Call option premiums increase as you go further out in time, giving you a lower break-even, but a lower annualized yield also:

AAPL-TIME-405

“Static Break-Even” equals the difference between the stock’s cost of $405.12, and the call bid premium for each month’s strike price. If the stock remains static, (it doesn’t rise above the strike price at or near expiration), then the stock usually doesn’t get assigned/sold away from you. You keep your shares, and move on.  If the stock does rise above your strike price, your AAPL shares will get assigned/sold, and you’ll earn an additional profit. (In general, most assignments occur at or near the time of expiration.)

In the above examples, we used a $410.00 strike price, which is $4.88 above the $405.12 cost of AAPL.  This represents your potential assigned gain.  To calculate your total gain, just add the call bid premium to the potential assigned gain. Ex.) For the March 2012 $410.00 call, you’d receive a $21.05 call bid premium. If AAPL rises higher than the $410.00 strike price, most likely your shares will be sold/assigned, and you’ll also earn an additional $4.88 in price gains, for a total gain of $25.93.

How to hedge your 2011 price gains: The table below uses AAPL’s 1/3/11 $325.64 price as a cost basis, and shows what % of AAPL’s year-to-date 2011 profit you could hedge, via selling $410.00 covered calls in different expiration months.  As usual, the further into the future you sell, the higher premium you get, and the more of your profit you hedge, but your annualized yield decreases. (Note: The call bid premium is based upon what the current bid/offer is for each option, as opposed to the ask/sell price. There’s often quite a spread between the two, so you may be able to sell at a higher premium than the current call bid premium):

AAPL-TIME-325

2. Which call option strike price should I sell at – i.e., Should I choose an option strike price closer to, or much higher than the stock’s current price?

Option sellers usually base this decision upon their take on the market, and the stock’s future prospects for price gains.  The more bullish you are on a stock, the further “out of the money”, (above the stock’s current price), you may wish to sell calls at. The reason being that, when you sell a call option, you’re obligating yourself to potentially have to sell the stock in the future, at your sold call option’s strike price, no matter how much higher the stock rises. (Note: 1 option contract corresponds to 100 shares of the underlying stock.)

So, if you feel that AAPL might rise far beyond its current $405.00 price, (as do several analysts), you’d probably choose to sell at a higher strike price than a more bearish investor, who is more interested in locking in current price gains, and creating more immediate income, than in speculating on potential future price gains.  Indeed, that’s one of the other attractions of selling covered calls, you know exactly what your upside potential and your downside break-even are before you make the trade.

The trade-off is that call options further above the stock’s price, (out of the money), have a lower premium than those closer to the stock’s price, (at the money), or below a stock’s price, (in the money).

Here’s a comparison of various strike prices, using $405.12 as AAPL’s cost basis to further illustrate this point:

AAPL-STRIKE-405

Your potential assigned price gain per share increases with each higher strike price. However, your downside break-even price also increases.

The table below compares how much % of year-to-date AAPL profit you can hedge, using different strike prices:

AAPL-STRIKE-325

Again, your % of profit hedged declines, as you sell at a higher strike price, but your potential for additional price gains increases $5.00 with each higher strike price, in this example.

A bullish investor might choose a higher strike price for AAPL, leaving himself more potential for additional price gains on top of the current $79.48 year-to-date profit. (The additional price gains are calculated as the difference between $405.12 and the strike price.)  A less bullish. or conservative investor may wish to sell at a lower strike price, and hedge more of his year-to-date profit.  He’d also have a lower break-even.

Trading Range: If you sold a call at the $420.00 strike price from the table above, your trading range would be:

Max. Price Equivalent of $470.75, ($420.00 strike price plus $50.75 call bid premium), and Downside Break-Even of $274.89, ($325.64 stock cost basis less $50.75 call bid premium).

Valuations: Small wonder that AAPL is so popular with institutional and individual investors, when you consider its strong growth has happened during a period of recession and slow economic growth. 

AAPL-PEG

Financials: There’s not much to quibble about with AAPL’s financial metrics either, although many AAPL shareholders would like to see the company join other Tech firms, such as Cisco, and enter the ranks of dividend paying stocks. However, for dividend investors, selling covered calls and cash secured puts offer 2 lucrative alternatives for creating income from AAPL.

(Note: You can see details on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

APPL-ROE

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

How To Create An Apple Dividend

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.

AAPL-JAN TRADE

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.

AAPL-OCT TRADE

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:

AAPL-BlueChart

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:

AAPL-2 TRADE COMP

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

Top Dow Dividend Stocks – Dividends vs. Options

By Robert Hauver

The Dogs Of The Dow strategy focuses on the Dow dividend paying stocks with the highest dividend yields. Currently, the 3 highest dividend paying stocks in the Dow are AT&T, (T), Verizon, (VZ), and Merck, (MRK).  This week we’ll compare current covered calls and cash secured put options to the dividend payouts for these stocks, all of whom are listed in our High Dividend Stocks By Sector tables.

Here’s how these 3 stocks have performed:

T-VZ-MRK-Perf

Like most other Healthcare stocks, Merck has lagged the market over the last year.  In 2011 it has also lagged the Healthcare sector, which is up nearly 10%.  AT&T and Verizon have both surged over the past year, partially due to the smartphone revolution.  AT&T benefited greatly from its exclusive sales arrangement with Apple, (AAPL), for selling the IPhone, an exclusivity which was lost, when Apple also granted Verizon selling rights in 2011.

Selected Financial Metrics:

T-VZ-MRK-ROE

AT&T is the clear winner in terms of ROE. The 2 Telecoms also have much higher operating margins than MRK.

Valuations:

T-VZ-MRK-VALUE

Again, AT&T has outperformed these other 2 firms, in past EPS and present EPS growth, in addition to having the lowest Price/Book, and PEG ratio, which, at 1.63, isn’t that attractive. However, its PEG for next year, at 1.31, is closer to being undervalued.  Although all 3 stocks are currently far below their values on a Discounted Future Earnings basis, Merck is sporting a very high PEG ratio for the next year, thanks to its stratospheric current P/E.

Covered Calls vs. Dividends:

T-VZ-MRK-CALLS

Selling 6-month covered call options is one way you can increase your income on these stocks. Note how the call premiums are all higher than the dividends paid out during this term.  You’ll find more details on these and other covered calls  in our Covered Calls Table.

Cash Secured Puts:

T-VZ-MRK-PUTS

These cash secured puts will give you an entry point/break-even even further below those of the covered calls.   Our Cash Secured Puts Table has more details on these and other put options trades.

Disclosure: Author is long shares of AT&T, and short puts of AAPL.

Disclaimer: This article is written for informational purposes only and is not intended as investing advice.

Apple – Undervalued, Strong Growth, and High Options Yields

By Robert Hauver

Although Apple, (AAPL), pays no dividend, and is outside our normal realm of high dividend stocks, one can’t help but be impressed by the stellar numbers they’ve put up during the past 4 fiscal quarters.  At a time when many consumer goods firms were struggling, AAPL blew away its year-ago earnings and sales every quarter:

eps-2011-01-20

Here are some of the metrics associated with this success:

AAPL-ROE-2011-01-20

All of this begs the question – if Apple is up 60% for the past 12 months, is it still undervalued?  Here’s a look at its current growth valuation metrics:

AAPL-PEG-2011-01-20

AAPL’s current P/E is at the bottom end of its range for the past 5 years, and, its next 5-year PEG is just under 1, the recognized threshold for PEG under-valuation.  Of course, with the specter of  CEO Steve Jobs’ health issues, many investors might want some downside protection on AAPL, in spite of its strong past earnings and future projections.  Many analysts feel that AAPL’s earnings are safe for the next 1-2 years, due to their strong current product mix.  They also point to the experience and talent of the AAPL management team that Jobs has put together, as further reason for stability in the near-term future.

Here are 2 defensive ways, via selling put and call options, that you could earn double-digit yields from AAPL over the next 12 months:

1. Selling Covered Calls:

AAPL-CALL-2011-01-20

The above covered call options trade gives you a break-even of $290.69, which is approx. only 2.5% above AAPL’s 200-day moving average. In addition, you’d benefit somewhat from potential price gains.

There are further details in our Covered Calls Table.

2. Selling Cash Secured Puts:

AAPL-PUT-2011-01-20

Selling this cash secured put option gives you a very similar break-even point, $290.90. However, there are many other lower strike prices that would, in turn, give you a lower break-even, but a lower yield also.  There are further details on the above trade in our Cash Secured Puts Table.

Disclosure: Author is short AAPL puts

Disclaimer: This article is for informational purposes only, and isn’t intended as investment advice.

How To Turn Apple, (AAPL), Into An Income Stock

By Robert Hauver

Devotees of dividend paying stocks may find it strange to hear Apple’s name mentioned in an article about income stocks, but there is a straightforward, conservative way to earn income quickly from this well-run tech stock.

Even though AAPL doesn’t pay a dividend, income investors could earn just below 11% by selling put options on it. (See below for details).

Apple looks good in many metrics when compared to the Computer Hardware industry:

Apple Computer Hardware Industry
ROE 31.90 27.61
ROA 28.96 22.07
ROI 19.35 13.66
Income/Employee $1.36 mln $ .96 mln
Profit Margin 20.04% 13.47%
Debt/Equity NO DEBT 20.10%

However, it does command a valuation premium to its peers:

But AAPL doesn’t seem so pricy when you compare its earnings to its closest peer in the Personal Computer Industry…  Click here…to learn more