The put contract our YieldBoost algorithm identified as particularly interesting, is at the $105 strike, which has a bid at the time of this writing of $2.06. Collecting that bid as the premium represents a 2% return against the $105 commitment, or a 7% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to AAPL’s upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. So unless Apple sees its shares decline 12.8% and the contract is exercised (resulting in a cost basis of $102.94 per share before broker commissions, subtracting the $2.06 from $105), the only upside to the put seller is from collecting that premium for the 7% annualized rate of return.
Worth considering is that the annualized 7% figure actually exceeds the 1.7% annualized dividend paid by Apple by 5.3%, based on the current share price of $120.42.
And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to lose 12.81% to reach the $105 strike price.
Always important when discussing dividends is the fact that, in general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company.
In the case of Apple looking at the dividend history chart for AAPL below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 1.7% annualized dividend yield.
Turning to the other side of the Apple option chain, we highlight one call contract of particular interest for the February 2016 expiration, for shareholders of Apple looking to boost their income beyond the stock’s 1.7% annualized dividend yield.
Selling the covered call at the $130 strike and collecting the premium based on the $2.87 bid, annualizes to an additional 8.5% rate of return against the current stock price (this is what we at Stock Options Channel refer to as the YieldBoost), for a total of 10.3% annualized rate in the scenario where the stock is not called away.
Any upside above $130 would be lost if the stock rises there and is called away, but AAPL shares would have to advance 8% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 10.3% return from this trading level, in addition to any dividends collected before the stock was called.
The chart below shows the trailing twelve month trading history for Apple stock, highlighting in green where the $105 strike is located relative to that history, and highlighting the $130 strike in red:
The chart above, and the stock’s historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the February 2016 put or call AAPL options highlighted in this article deliver a rate of return that represents good reward for the risks.
We calculate the trailing twelve month volatility for Apple (considering the last 252 trading day AAPL historical stock prices using closing values, as well as today’s price of $120.42) to be 26%.
In mid-afternoon trading on Monday, the put volume among S&P 500 components was 926,333 contracts, with call volume at 1.19M, for a put:call ratio of 0.78 so far for the day, which is unusually high compared to the long-term median put:call ratio of .65.
In other words, at that point in time there are lots more put buyers out there in AAPL options trading than would normally be seen, as compared to call buyers.