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Apple (AAPL) stock is stuck in a trading range. This is good for near-term expiring covered call option plays and out-of-the-money short put plays. Investors can make extra income with these trades.
AAPL closed at $191.24 on Friday, Dec. 1, 2023, and is up $13.67 or +7.7% since it closed at $177.57 on Nov. 2. That is when the company reported its fiscal Q4 results ending Sept. 30. But the stock is still off of its peak of $196.45 from July 31.
In other words, investors have been cautious with the company. I discussed the company's results and its 2.8% YoY sales drop in my Nov. 5 Barchart article, “Apple Could Still Be Worth More Due to Its Strong Free Cash Flow.”
Analysts Are Cautious
I pointed out that Apple is still powerful financially, as it generated $100 billion in free cash flow (FCF) over the past year. There is every reason to believe that it will be able to grow its FCF over the coming year.
However, analysts are still hesitant about the stock. For example, the average price target from Refinitiv's survey of 38 analysts (as reported by Yahoo! Finance) is just $198.01 per share. That implies an upside of just $6.77 or just +3.5% from today's price.
Similarly, AnaChart, a new sell-side analyst tracking service shows that the average upside for 37 analysts is just $11.09 per share. The top performance analyst as ranked by AnaChart is John Vinh of Keybank, with a performance score of 2.44. He has an upside of $30.32 for AAPL stock.
Nevertheless, most analysts don't see much upside left.
Selling Covered Calls and OTM Puts for Income
This makes it ideal for selling covered calls and shorting out-of-the-money (OTM) puts. That way existing shareholders, who make a paltry 0.50% in dividend income, to generate extra money while they wait for the stock to rise.
I discussed this strategy in my Nov. 24 Barchart article, “Apple's Free Cash Flow Margins Have Dropped - Has AAPL Stock Peaked?” I pointed out that shorting the $200 calls and the $175 puts for the expiration period ending Dec. 22 would be worthwhile.
Let's see how those trades have performed so far. The expiration period is still about 3 weeks away from expiration and it might be worth it to do these trades today.
For example, the $200 calls are now trading for 37 cents. That is lower than the 45 cents in my earlier article, but the covered call yield still looks attractive at 0.19% (i.e., $0.37/$191.24). This is still a good trade since the annualized expected return is 3.28% (i.e., 0.193% x 17) given that there are 17 periods of 3 weeks in a year.
However, it might make more sense to short a further strike price like the $205 strike price. The $200 strike is just 4.58% over today's price and that might not be enough. The $205 strike has a lower yield (0.05%), but there will be less chance of your shares being called as it is 7.2% out-of-the-money.
Another I recommended was to short the $175 strike price puts. At the time the trade produced 38 cents in premium. That works out to a yield of 0.217% (i..e., $0.38/$175). However, today the premium is just 18 cents.
That is a good thing for the investors who followed this recommendation as their short play is working. But for new investors, it might make sense to short the $180 put strike price. The premium is 34 cents, which produces a yield of 0.189% (i.e., $0.34/$180).
If this can be repeated every 3 weeks the annualized expected return is 3.2% (i.e., 0.189% x 17).
The bottom line is that shorting OTM calls and puts is a good way to make extra income for existing AAPL shareholders. That allows them to be paid while waiting for AAPL stock to move out of its trading range.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
