Copyright Investor's Business Daily
Apple (AAPL) stock is set to report earnings on Thursday after the closing bell and the options market is pricing in a 3.9% move in either direction. The implied volatility of this week's options chain for Apple stock is sitting around 47%. Apple normally trades with implied volatility around 25%. Today we'll look at selling a cash-secured put to take advantage of the high implied volatility around the earnings announcement. Cash-Secured Put For Apple Stock A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price. Cash-secured puts are very similar to a covered call and are quite easy to understand once you know the basics. It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price. For Apple stock, a trader selling the Oct. 31 put with a strike price of 260 will generate around $190 in premium per contract. The put has a delta of 24, which means there is an estimated 76% chance that it will expire worthless. The put seller would have the obligation to purchase 100 shares of Apple stock at 260 if called upon to do so by the put buyer. The break-even price for the trade takes the strike price less the premium received. That gives a break-even price of 258.10. That's 3.9% below Apple's price this morning around 268.50. How The Trade Works If the stock stays above 260 at expiry, the put option expires worthless, leaving the trader with a 0.7% return on capital at risk in just a few days. That works out to an incredible 67% on an annualized basis. The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put. Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own. With this example, the trader either generates a 0.7% return in a few days, or they get to purchase Apple stock at a reasonable discount on the current price. If Apple stock trades below 260 and the put gets assigned, investors can then sell covered calls against the position to generate further income. Apple Stock Ratings Investor's Business Daily gives Apple stock a Composite Rating of 91 out of a best-possible 99, an Earnings Per Share Rating of 84 and a Relative Strength Rating of 80. According to IBD Stock Checkup, Apple ranks second in its group. Please remember that options are risky and investors can lose 100% of their investment. Gavin McMaster is founder and operator of Options Trading IQ, which offers instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ. YOU MIGHT ALSO LIKE: Poor Earnings Reaction Sets Up Bearish Netflix Trade How To Make The Dividend Yield On Exxon Even More Attractive How To Make Marvell Stock Float Like A Butterfly With This Trade Amazon Pre-Earnings Trade Strategy Offers A Quick Return Or Discounted Stock Ownership
