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Apple Inc (AAPL) stock seems stuck below $200 per share in a trading range. This is ideal for short sellers of out-of-the-money (OTM) put options in close expirations. AAPL shareholders can make extra income.
As of morning trading on Monday, Dec. 18, 2023, AAPL is at $194.77 per share. This is off its recent high of $198.11 on Dec. 14., but up just 2.7% from a month earlier price of $189.69 on Nov. 17. In short, AAPL stock seems stuck in a trading range.
That is good for short sellers of OTM options, especially short-put plays. These kinds of trades allow existing shareholders to make extra income. That helps them wait for the stock to rise, especially since AAPL's dividend yield is only 0.50%.
Shorting OTM Puts Works Best for AAPL Holders
I discussed this play in my Dec. 3 Barchart article, “Apple Is Caught In a Trading Range - Good For Covered Call and Short Put Plays.” For example, I recommended selling short $200 strike price call options for $0.37 expiring Dec. 22. I also suggested shorting Dec. 22 $180 put options for 34 cents.
At the time both plays were out-of-the-money. Since then both the call and put premiums have fallen in price, which is good for short sellers. But the put options have fallen the most and are down to just 4 cents.
Rolling this trade over and doing another short put trade might make sense. That involves buying back the short put trade for 4 cents. However, the $187.50 strike price put option contract expiring on Jan. 5, 2024, now has a 60 cents premium on the bid side. That can be seen in the chart below.
The advantage of doing this is that the premium is higher (i.e., 56 cents on a net basis after rolling the existing short-put trade over). Moreover, it is still 3.80% out-of-the-money and the expiry period is less than 3 weeks away.
This trade, on a net basis, works out to an immediate yield of 0.32% (i.e., $0.60/$187.50) for just 3 weeks. That works out to an annualized expected return (ER) of 5.44% assuming it can be repeated every three weeks. That is because there are 17 periods of 3 weeks in a year.
How This Works
Here is what this means on a practical basis. First, an investor must secure $18,750 in either cash and/or margin with their brokerage firm. They must get approval to be able to cash-secured puts from that brokerage firm.
Then they can enter an order to “Sell to Open” 1 put contract at the $187.50 strike price for expiration on Jan. 5, 2024. Immediately the account will receive $60 (i.e., $0.60 x 100) since there are 100 shares underlying every put contract.
That means that the account has made an immediate yield of 0.32% (i.e., $60/$18,750). The investment amount is now lower at $18,690. In other words, the stock could fall to $189.60 before there is any unrealized loss. That is 4.13% below today's price.
Even if AAPL falls to $187.50, the shareholder is only obligated to use the cash that is already secured to buy 100 shares at that price. This may or may not reduce the investor's average cost in the stock and may or may not result in a short-term unrealized loss.
To ameliorate the situation the investor could sell OTM calls with the new shares covering any potential obligation. That would bring in more income.
The bottom line is that this is a good way for existing shareholders in AAPL stock to get paid extra income while the stock is stuck in a 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.
