We all know the Feds are printing money like crazy, and the stock market will keep rising until the US election in November, so it’s prudent to take a position in the stock or stocks that will benefit from a rising market.
Most of my portfolio is in gold, but you’ve got to diversify, so I looked at the big stocks and picked Apple.
(I should have picked Amazon, but hey, what do I know)?
Here’s the experiment I did:
On January 13 I bought 200 shares of Apple for $311.87. On Friday Apple closed at $309.51, so I’m down $2.36 or $472 excluding commissions. Apple touched $328 after great earnings on Wednesday, but then the market tanked, due in part to issues in China, so I’m down on the transaction.
But wait, there’s more!
To mitigate my risk, I’ve done covered writes, where I sell call options, covered by the underlying stock. Here’s what I did:
- January 13, sold 2 contracts of the $312.50 calls, expiring on January 17, for $3.55 (proceeds, including commission was $697.51)
- That didn’t work out so well because Apple immediately increased, so I bought them back for $4.06 (cost $824.49( and immediately sold the $320 calls for $1.26 (proceeds $239.51). On January 17 Apple was below $320, so they expired and I kept the premium.
- On January 23, I sold 2 contracts of the $320 calls, expiring on January 24, for $0.67 (proceeds, including commission was $121.51). They expired worthless the next day and I kept the premium.
- On January 27, I sold 2 contracts of the $317.50 calls, expiring on January 31, for $5.17 (proceeds, including commission was $1,021.51). Since Apple closed below $317.50 on Friday, they also expire worthless, and I keep the premium.
The net impact of doing these covered writes? I have an extra $1,255.55 in my account, which more than makes up for the notional loss of $472 I have on the stock.
Not bad.
Not great either. If I was smart, which I’m not, I would have bought calls instead of the stock to use as the underlying security for the covered write. My 200 Apple shares cost just over $62,000, so I have $62,000 in capital tied up and I earned $1,255.55 – $472 = $783.55. Assuming I can replicate that exactly every month (which I can’t), that’s $9,402.60 on the year, or a return of 15%. Not bad, but I’ve got $62,000 at risk, so if the market tanks, I can easily lose more than 15%. Apple went from $328 to $308 in three days this week, a drop of 6%, so volatility could bite.
A better strategy would have been to buy the June 2020 calls, so instead of buying the stock at $311.87 I could have bought the $310 calls which were around $28.50 at the time, for an all in cost of just over $5,700, so the most I can lose is $5,700, not $62,000.
Have I learned my lesson?
Will I sell my Apple stock and replace it with June or July calls instead?
I’ll ponder it and let you know next week.
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