Investing with options: Apple, Inc. earnings

Strategies

• Execution: BuyToOpen 1 20-Sep-2024 145 Call @ $37.80 (Delta: 0.8055)
• Premium and risk: Per share: $37.80 (debit)
  • Premium cost: $37.80 x 100 (per contract) = $3,780
  • Max risk: $3,780 (if AAPL remains below 145 at expiry)
  • Max reward: Significant (increases as AAPL stock price goes up)
• Breakeven point: $145 (strike) + $37.80 (premium) = $182.80
• Rationale: A long call with a far-off expiration reduces the impact of time decay, and a high delta captures more of the stock's upward movement.
• Stock vs options comparison: With $3,780, you could buy approximately 22 shares of AAPL at its current price of $170.76. A $1 price increase yields a profit of $22 for the stock but $80.55 for the call option (100 x $1 x 0.8055).  

2. Bullish outlook - selling ITM put options:

• Execution: SellToOpen 1 03-Nov-2023 172.5 Put @ $4.55 (Delta: -0.5715)
• Premium and risk: Per share: $4.55 (credit)
  • Premium earned: $4.55 x 100 (per contract) = $455
  • Max risk: Significant, if AAPL falls considerably.
• Breakeven point: $172.5 (strike) - $4.55 (premium) = $167.95
• Rationale: Opting for a near-term expiration date amplifies the rate of time decay, accelerating the profitability of the trade if Apple's stock price stays above the strike price. Although the risk exposure is significant in case of a sharp downturn, the strategy serves a dual purpose: it either nets a swift premium or obligates the purchase of Apple shares at an effective discounted rate below the strike. Essentially, this approach allows you to generate quick income or buy into the stock at a lower cost basis, thereby aligning with a bullish outlook.
• Stock vs options comparison: Effective price: $167.95 vs current price: $170.76. Discount: $2.81 per share. Percentage Discount: 1.64%.

3. Bearish outlook - buying put options:

• Execution: BuyToOpen 1 20-Sep-2024 190 Put @ $24.40 (Delta: -0.6384)
• Premium and risk: Per share: $24.40 (debit)
  • Premium cost: $24.40 x 100 (per contract) = $2,440
  • Max risk: $2,440 (if AAPL stays above 190 at expiry)
• Breakeven point: $190 (strike) - $24.40 (premium) = $165.60
• Rationale: This strategy adopts a longer expiration period to mitigate the adverse effects of time decay (theta), providing ample time for the market to align with a bearish forecast. While the initial premium outlay is substantial, the benefit is a leveraged position that can offer outsized gains on any significant downside movement in Apple's stock price. This approach offers a directional bet against the stock without the need to short it, which is particularly relevant given the limitations on shorting stocks in many EU countries.
• Stock vs options comparison: In the absence of the option to short stocks in several EU jurisdictions, this put option serves as an efficient alternative. A $1 decrease in Apple's stock price would translate to an estimated $64 gain per option contract (calculated as 100 shares per contract x $1 price decrease x Delta of -0.6384).

4. Neutral/bullish outlook - writing covered calls:

• Execution: SellToOpen 1 10-Nov-2023 177.5 Call @ $1.40 (Delta: 0.2523)
• Premium and risk: Per share: $1.40 (credit)
  • Premium earned: $1.40 x 100 (per contract) = $140
  • Max risk: The risk lies in the stock ownership, which is capped at the stock's current market price of $170.76 x 100 (per contract) = $17,076.
• Breakeven point: Varies based on stock cost basis
• Yield:
  • Yield Calculation over 11 Days:
    Yield = (Premium earned / Cost of Stock) x 100
    Yield = ($140 / $17,076) x 100 = 0.82%
  • Annualized Yield:
    Annualized Yield = (0.82% x 365) / 11 = 27.24%
• Rationale: The primary aim is to generate additional income from your existing stock holding, recognizing that this comes with the trade-off of having a capped upside potential. If Apple’s stock trades above $177.5 at expiration, you'll have to part with your shares at that price.
• Stock vs Options Comparison: Writing a covered call allows you to secure immediate premium income, with the risk that your Apple shares could get called away at $177.5, representing a capped upside but also a potential profitable exit for your stock holding.

Conclusion

• Buying calls: The leverage effect of a call option allows you to control the same amount of stock with less capital. A $1 increase in Apple's stock results in an $80.55 gain with a call, compared to a $22 gain by holding 22 shares of the stock for the same amount of capital.
• Selling ITM puts: This strategy could allow you to acquire Apple at a discounted rate compared to buying shares directly. The effective purchase price would be the strike minus the premium received, which can be calculated as a percentage discount against the current stock price.
• Buying puts: Options offer a leveraged way to bet against the stock with a defined risk, which can be particularly useful in volatile times.
• Writing covered calls: This strategy provides additional income and an annualized yield of 27.24%, which you can't get by just holding the stock.

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