Chart of the Day – Apple (AAPL) Overwrite

by Dan August 3, 2017 10:29 am • Trade Ideas

Yesterday, following better than expected fiscal q3 results and fq4 guidance shares of Apple (AAPL) gapped to a new all time high, barely squeaking out a new closing high. Obviously, the chart has some technical resistance at the prior high, but to my eye there is nothing quite wrong with this picture. I suspect real technicians (I’m just a tourist) would tell you the stock paused right where it should have:

 

Near term, with investors digesting earnings, with the broad market at all time highs, mega-cap tech stocks like AAPL, Amazon (AMZN) Alphabet (GOOGL), Facebook (FB) and Microsoft (MSFT) who have contributed a good bit to the year to date gains look poised to consolidate a bit into the fall. For AAPL in particular though, a gap fill places the stock back towards $150, right above the uptrend from November which looks to be a decent long entry for those who might look to reload on the long side into the iPhone launch in the fall.

But a stock like AAPL that is likely to be a bit less volatile that FANG stocks, and the price of options in the stock reflect that. But slightly elevated vol in a stock that could be poised to consolidate might present a good opportunity for long holders to add yield by selling short dated out of the money calls:

Bloomberg

For instance with the stock at $155.85, you could sell the Sept 160 call at $2.70, or 1.7% of the stock price. If the stock is 160 or lower on Sept expiration you would receive the $2.70 in premium in about 6 weeks. If the stock were 160 or higher you would have a Call-away level on the stock at $162.70 up nearly 5%. Obviously, a long holder who is short calls can always cover the call if the stock is above the strike and keep the position intact, but overwriting strategies offer lots of “optionality”… an embedded downside buffer (lowering the cost basis), potential for yield enhancement or merely a good till cancel sell order that pays you until it is called away. This is not really a hedge as a downward move in shares would lose more than the over-write, but it is a good play for those that think share could consolidate a bit after this move higher.