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Apple Inc. (AAPL) stock has risen based on its recent dividend hike and higher share buyback program. AAPL stock is now over its historical P/E average. This makes shorting puts attractive for investors.
We discussed this in our last article on Apple on May 7, “Apple Hikes Its Dividend And Stock Buybacks, Making It More Attractive To Value Buyers.” There we discussed the company's recent 4% dividend hike and its increase in its share buyback program from $76 billion to $90 billion. That represented 3.3% of its market cap at the time.
Valuation Issues
However, AAPL stock is now at $180.95 per share as of June 2, putting it on a fairly high price-to-earnings (P/E) ratio. For example, analysts currently estimate earnings per share (EPS) of $5.99 for the fiscal year ending Sept. 2023 and $6.54 for the year ending Sept. 2024. That puts AAPL stock on a forward (2024) multiple of over 27.6x.
This is significantly higher than its historical average. For example, Morningstar reports that AAPL stock has had a five-year forward P/E average ratio of 23.37x. Seeking Alpha reports that the five-year forward P/E is 23.89x.
This implies that the stock might have risen a bit too much. Or, alternatively, the stock might stay flat for a while until its earnings growth catches up with the stock price, lowering the P/E ratio.
Either way, it means that the value investors might want to find other ways to make money on their holdings in AAPL stock, assuming they don't want to sell their shares. One way to do this is to short out-of-the-money (OTM) put options.
Shorting OTM Puts in AAPL Stock
Shorting OTM puts provides extra income to investors. In our last article we suggested that shorting the $160 and $165 strike price puts that expired on June 2 would be worth doing. Those investors would have received 73 cents or $1.34 respectively by shorting these puts.
Those puts expired worthless since AAPL stock closed at $180.95. So the investor was able to keep all the money and not have to purchase the stock at those strike prices. At the time these puts were 7.8% and 4.9% below the stock price, giving the investor some protection on the downside.
Today the same investor may want to short OTM puts expiring on June 30 to create similar income opportunities. For example, the $170 strike price put options, which are $10.95 or 6% below today's price of $180.95, trade for 98 cents per put contract.
That allows the investor to make an immediate yield of 0.577% (i.e., $0.98/$170), or an annualized basis, assuming the trade is repeated each month, 6.9%. For example, the investor first secures $17,000 with their brokerage firm in cash and/or margin. Then they enter in an order to “Sell to Open” 1 put contract at the $170 strike price. Their account will immediately receive $98 since each contract represents 100 shares.
A more enterprising investor may be willing to sell short the $175 strike price puts for a much premium of $1.87. That provides a higher yield of 1.07%. But they should also have a strong belief that AAPL stock won't fall below $175 on or before June 30.
Otherwise, they will have to purchase AAPL stock at $175 and they may have an unrealized loss if AAPL goes below $175.00. However, their breakeven will be lower at $173.13, or 4.3% below today's price.
And a more conservative investor may be willing to accept a lower yield. For example, the $165 strike price puts offers put premiums at 54 cents. That represents a yield of 0.327%, or 3.92% on an annualized basis. But at least here the investor creates extra income with a much lower potential of having to buy the stock with an unrealized loss.
In any case, this shows that given the runup in AAPL stock, investors have choices to create extra income by shorting OTM puts.
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.
