At a Premium – AAPL, DIS, XOM Updates

by CC November 28, 2016 2:51 pm • Trade Ideas

On August 30th, we wrote a recap of some trade ideas Dan presented on a panel at the Ameritrade Investools Conference. The ideas focused on 3 widely held stocks in big cap tech, media and energy. I wanted to recap the trade ideas and look at how they’ve fared since the conference. (The original post is here)

First, let’s check in on yield enhancement strategy in Apple (AAPL). Here was the idea:

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

Apple shares have been on a bit of a roller coaster ride since, with lows near 100 and highs briefly above the short strike (we wrote about possibilities to roll the strangle for those not wanting to be called away here). But for those that were patient, like most short premium strategies, time has paid off. The original strangle, sold at 3.25 is now worth less than .60. That’s an additional 2.5% on the gains of about 4.5% in the underlying since initiation. Strangle sales are a great way to add yield, especially on a mega-cap company like AAPL, and selecting strikes should be a combination of technical levels (support and resistance) and also where you’d be willing to buy more shares on a sell-off and where you’d be happy taking profits on a rally. Those technicals and those buy/sell levels are often the same spots, as they should be.

The next earnings event in AAPL is late January, after expiration. A roll of the Dec strangle therefore could make sense. But the issue is implied volatility is extremely low at the moment. The Jan 100/120 is about 1.10 here. A better idea for trade management is maybe to let the Dec strangle decay a little closer to zero, and maybe try to take advantage of any spike in IV on some down days in the stock before the roll. Of course that risks the stock going higher to the 115 strike and above, so I would use that level as a stop and close the Dec strangle for a profit if the stock threatens that level. Or you could just close the Dec now and put on the Jan and have no risk of being called away until 120. But it is low vol and will likely rise at some point.

Next to look at is a buy-write in XOM. The idea here was to catch a falling XOM while taking advantage of some elevate implied vol with a call sale:

Buy 100 shares of XOM at $87.75 , Sell 1 Nov 92.50 call at 75 cents

The November call expired worthless (for a .75 profit) and the stock is very slightly lower at 87.10. Therefore, the over-write did it’s job. In this case lowering the cost basis of the stock and covering its slight decline. So what to do now? Roll the call sale. The Jan 90 calls are 1.10 bid and would make for a nice 1.25% added yield if they too expire worthless. If the stock goes higher and through the 90 strike, profits will have equaled gains in the stock plus the 1.85 from the two call sales. Not bad. If it goes lower, the cost basis on stock will have been reduced by 1.85, also not bad (but obviously not a hedge).

The final trade idea to look at was also a stock that had seen some selling, Disney. The idea here was to play for a bounce, but with defined risk:

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

This is a bit of a historical look as both options in the calendar expired, but the stock did exactly what you wanted it to do, as the October calls expired worthless, and the Nov calls expired in the money. The stock is up since the original entry and therefore the entire trade was profitable.

In all the three cases we took advantage of premium sales, either overall, or in the case of the Disney near term to finance later. In the case will all premium sales, patience is a virtue as you need to ignore a lot of the day to day gyrations of the stocks. This is where technical levels can be a great benefit because as long as the stock holds those trends you can be comfortable with your chosen strike sales.