Today I had the pleasure to speak at TD Ameritrade’s annual Investools conference alongside my Options Action co-panelist Michael Khouw. As part of the discussion, he and I both detailed some options trade ideas in some widely held stocks. The Investools audience are for the most part self-directed /DIY TD clients who use TD’s technology tools and Investools education to evaluate, execute and manage their trades/investments.
Our first topic of conversation was technology stocks. I was asked to offer up a strategy for existing Apple (AAPL) holders, here it is:
Apple (AAPL) – Yield enhancement for current holders of the stock:
vs 100 existing shares of AAPL ($106.75)
Sell the Dec 115 / 95 strangle at $3.25
Sell 1 Dec 115 call at 1.80 call
Sell 1 Dec 95 put at 1.45 put
Rationale: Adds 3% yield in 3 months if stock below $115 and above $95, (stock’s current annual div yield is 2.15%) Can act as a buffer if stock is lower (but above 95 on expiration) by adding 3.25 in yield, so losses in overall position don’t start until 3.25 lower than where the stock is currently (assuming the stock is above 95 on Dec expiration).
Worst case scenario – you are put 100 more shares of AAPL at 95 (down 11%) and suffer additional losses of stock below $91.75 (put stock at 95 less $3.25 buffer)
Best Case – stock at or near 115, call and put expire worthless, have gains of stock and added gain of $3.25, or 3% in additional yield. (12% annualized).
Upcoming events: AAPL will introduce their iPhone 7 to the public on September 7th, and it should go on sale within a couple of weeks. Consumer and press reaction will be important from a sentiment standpoint for the stock considering its run from its 52 week lows made in June from below $90. The company will report their fiscal Q4 results in the third week of October. The stock has moved on average nearly 6% the day following the last 4 quarterly reports.
From purely a technical standpoint the risk to this overlay is a break back below the downtrend from the 2015 all time highs that could find the stock once again banging around in the $90s. But as long as the stock is above 95 this trade helps:
The second topic discussed was energy stocks. Here’s a long biased idea in Exxon.
Exxon (XOM) – Buy Write for those who think big oil has made a bottom and large E&P stocks could make a run back at recent highs or merely consolidate:
Buy 100 shares of XOM at $87.75 , Sell 1 Nov 92.50 call at 75 cents
Break-evens on Nov Expiation:
Best Case Scneario: stock is at or near $92.50, have gains of stock and receive 75 cents (equal to the stock’s quarterly dividend). XOM trades ex-dividend Nov 7th.
Worst Case: stock below $87 and suffer loses of the stock as the .75 call sale lowers the cost basis to 87, so it helps a little but not much. An over-write like this shouldn’t be thought of as a hedge in any way.
Rationale: Call sale serves as small buffer to $87 on the downside but the real gains are if the stock goes higher and the yield is added. Stock will be called away at $92.50, up 5.5%, but effectively at $93.25 with the call sale included. Investors can always buy back the short call and keep stock position intact. closer to expiration.
Technicals: $85 appears to be decent near term support, also lining up with the stock’s 20o day moving average (yellow), but for those looking for long exposure, using an $85 stop to the downside, with the small buffer of the call sale could be a good way to manage risk:
The third topic we covered was in Dow 30 stocks. Here was my idea.
Disney (DIS) – Finance contrarian earnings play while defining risk. If you are inclined to think that DIS’s fiscal Q4 results expected in the first week of Nov could mark the end of a year plus, 22% decline then look to finance Nov calls by selling a same strike call in October.
DIS ($94.65) buy Oct / Nov 97.50 Call Calendar for $1 (that is max risk)
Sell 1 Oct 97.50 call at .85
Buy 1 Nov 97.50 call for 1.85
Break-Even on Oct Expiration: If stock is 97.50 or lower on Oct expiration then the Oct call expires worthless and you have financed owning the Nov 97.50 call which will catch Q4 earnings and plenty of TV opportunity for their networks with the election and football and box office with a new Star Wars movie due in December.
From purely a technical standpoint, the chart is a train-wreck. The next stop is obviously $90 to the downside with little support below. A perfect stock to define one’s risk in if looking the other way. If the stock goes lower, the most you can lose is $1. If the stock is able to find some legs here there are numerous scenarios for profits. The best case scenario is a slow creep up to 97.50 near Oct expiration and then the position can be rolled to form a cheap Nov vertical that captures earnings: