/Apple%20Logo%20on%20Store%20Front.jpg)
Apple Inc (AAPL) has paid four quarters of dividends at the present 23 cents quarterly rate and is likely to hike it at the end of April. This could act as a catalyst, along with higher cash flow, for AAPL stock. However, investors who short its put options could end up making even more income.
Apple last reported its Q1 earnings on Feb. 2, 2023, for the quarter that ended Dec. 31, showing its operating cash flow was $34 billion. This was based on $117.2 billion in revenue, which means the company's operating cash flow margin is still high at 29%.
Apple also returned $25 billion to shareholders through dividends and share buybacks, although over 83% of that was from stock repurchases.
However, when Apple reports its upcoming fiscal Q2 earnings ending March in late April it's likely to slightly hike its dividend. This is because the company typically does this after every four quarters and it has done so every year in the past 9 years. For example, at 24 cents per quarter, the annual dividend yield will be 0.57% (i.e., $0.94/$164.90). This is about average with its trailing 12 months (TTM) yield according to Morningstar, but lower than the 94 basis points yield in the last five years.
As a result, some investors are drawn to increasing their income yield with AAPL stock, by shorting out-of-the-money (OTM) puts and calls.
Investors Can Increase Yield by Shorting AAPL Stock Puts and Calls
For example, for the period ending April 28, which is likely to be very close to Apple's upcoming earnings release date, the $180 strike price calls trade at 25 cents per call option. Keep in mind that this strike is over 9.1% over the AAPL stock price of $164.90 per share as of March 31, 2023.
Moreover, this means that the investor is able to make an additional 15 basis points of income for their investment in AAPL stock (i.e., $0.25/$164.90). If this is done every month for a year the investor can make 1.81% on an annualized basis.
Granted, investors could make much more by selling out-of-the-money (OTM) calls with other stocks. But for long-term shareholders in AAPL stock, selling deep OTM calls with a short time frame until expiration, is a good way to make additional income.
Another slightly more adventurous way to increase income, with the added benefit of potentially lower the average buy-in cost, is to sell short OTM puts. For example, the April 28 put options at $147.00 trade for 70 cents. That implies investors could make 0.48% in a trade that ends in 27 days. That works out to a 5.7% annualized return if it can be repeated every month for 12 months.
For example, if the investor secures $14,700 in cash and/or margin with their brokerage firm, they can then enter an order to “Sell to Open” one put option at the $147.00 strike price. The account will immediately receive $70, which implies that it has made an immediate yield of 47.6% (i.e., $70/$14,760). That is almost equal to the annual dividend yield that long investors in AAPL stock will make. If this trade is done every month the investor's account would make $840 in one year or 5.71% of the $14,700 invested with the brokerage firm.
Moreover, if the stock falls to $147.00 or below that within the next 27 days, the investor will be forced to buy the stock at this much lower price. That is not necessarily a bad thing as it is a sort of disciplined way to buy cheap, albeit it could lead to an unrealized capital loss situation. Nevertheless, the breakeven point will be will $146.30, or 11.3% below today's price.
On balance, then, investors in APPL stock are likely to do better shorting deep out-of-the-money put options rather than doing covered call trades. This is because they can make more income and potentially lower their buy-in cost with the OTM short-put strategy.
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.
