Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access both of our platforms from a single Saxo account.
Investing with Options - Apple, up close and ... covered or directional
Koen Hoorelbeke
Investment and Options Strategist
Summary: In our latest analysis, we dive into strategic options trading ahead of Apple's much-anticipated earnings announcement. We discuss a covered call strategy for investors bullish on Apple in the long term and two directional strategies - a Bullish Debit Call Spread and a Bearish Credit Call Spread - tailored to those with a definitive outlook on Apple's trajectory.
Investing with Options - Apple, up close and ... covered or directional
Strategizing with options ahead of Apple's earnings announcementAs the saying goes, an apple a day keeps the doctor away. For many investors, shares of Apple Inc. (AAPL) have certainly been a healthful addition to their portfolios this year. With the much-anticipated quarterly earnings announcement on the horizon, it's time to take a closer look at the tech giant's performance and what it could mean for our options strategies.
Since the beginning of the year, Apple has been on a substantial run, defying expectations and outpacing its peers. Starting at a modest $124.17 per share on January 3rd, 2023, Apple has seen its stock value surge to an impressive $195.83 at the close last Friday, July 28th, 2023. This remarkable growth, amounting to nearly a 58% increase in just seven months, has grabbed the attention of traders and investors worldwide.
As we approach the next earnings announcement, questions loom large: Will Apple continue this fantastic upward trajectory, or is a correction on the horizon? More importantly for the options traders among us, how can we craft a strategy to take advantage of the potential volatility around this earnings announcement?
In this article, we'll dive into the specifics of various options strategies, including covered calls and directional trades. These strategies could provide traders with ways to capitalize on the upcoming earnings announcement, whether they're bullish or bearish on Apple's prospects. Let's get started.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
A covered call for Apple-share owners
The first strategy which we're going to cover is a covered call. For those investors who already own Apple-shares, this could be an extra yield on an existing position. This covered call in particular is not for all Apple share-owners. It's a trade setup for those who are bullish on Apple on the longer-term, but who believe that the price will accumulate/settle at it's current level for a couple of weeks and only after that will make a significant move (up or down).
1. Underlying Asset: The underlying asset for this trade is Apple Inc. (AAPL:xnas). The last traded price of AAPL was $195.83 last Friday, July 28th 2023.
2. Covered Call Strategy: The strategy involves selling a call option while owning the underlying asset, known as a covered call strategy. The goal is to generate income from the premium received from selling the call while potentially selling the stock if the price rises above the strike price.
3. Option Details: The call option being sold has a strike price of $200 and expires on August 18, 2023. This means that if AAPL's price is above $200 on the expiration date, the option can be exercised, and you would have to sell your Apple shares for $200 each. However, if you don't want to sell your shares and the price is above the strike price as the expiration date approaches, you have the option to "roll" your position, which involves buying back the current call option and selling another one with a later expiration date and possibly a higher strike price. This can generate additional premium income and give the stock more time to potentially increase in value.
4. Premium: The premium received from selling the call option is $2.62 per share or $262 per contract (assuming 1 contract which corresponds to 100 shares). This is the income generated from the trade, which you get to keep regardless of what happens with AAPL's price.
5. Breakeven Point: The breakeven point for this trade is the stock price less the premium received. So, it's $195.83 - $2.62 = $193.21. If AAPL's price is above this level at expiration, the trade will be profitable.
6. Risk: The maximum risk in a covered call strategy is if the stock price falls significantly. However, the premium received from selling the call option provides some downside protection.
7. Calculating the yield:
1. Capital Invested: The capital invested in the underlying shares is the price of the shares multiplied by the number of shares. In the case of 1 call contract, it's 100 shares at $195.83 each, so the capital invested is $19,583.
2. Yield: The yield is the premium received divided by the capital invested. In this case, it's $262 / $19,583 = 1.34%.
However, this is the yield for the 18-day period until the option's expiration. If you want to annualize this yield to compare it with other annual returns, you can do so as follows:
Annualized Yield: To annualize the yield, you first calculate the number of 18-day periods in a year, which is 365 / 18 = 20.28 periods. Then, you multiply the yield for one period by the number of periods in a year. So, the annualized yield is 1.34% * 20.28 = 27.17%.
So, the yield for this covered call strategy is 1.34% for the 18-day period, or 27.17% on an annualized basis.
Please note:
- This is a simplified calculation and actual results can vary based on a variety of factors.
- Selling covered calls can generate income, but it also caps your upside potential because you may have to sell your stock if its price rises above the strike price. It's important to be comfortable with this trade-off before implementing a covered call strategy.
- If you possess a definitive outlook on the trajectory that AAPL will take, initiating a trade before the earnings announcement could be a profitable move. This is due to the heightened implied volatility, which results in a higher premium to collect. However, if you're uncertain, it might be prudent to hold off until just after the earnings are released and then contemplate new strike levels. While you may lose some options value due to the volatility slump, if Apple experiences a significant "gap-up", you could find yourself in a more secure position.
Directional strategies: a bullish debit call spread and a bearish credit call spread
If you have a strong directional view on the course that Apple's stock-price will follow in the coming weeks, you might consider these 2 "options" (pun intended):
1) Bullish Debit Call Spread
- Sell to Open AAPL 15-Sep-23 210 Call
- Buy to Open AAPL 15-Sep-23 190 Call
1. Strategy: You are looking at a Bullish Debit Call Spread on Apple Inc. (AAPL). This involves buying a call option and simultaneously selling another call option with a higher strike price on the same underlying asset and with the same expiration date. You would use this strategy when you expect a moderate rise in the price of the underlying asset, which in this case is AAPL.
2. Trade Setup: In this particular setup, you are buying to open a call option on AAPL with a strike price of $190 and selling to open a call option with a strike price of $210. Both options expire on September 15, 2023.
3. Premium and Risk: The net debit you're paying is $7.70 per share, which is the cost of the long call minus the premium received for the short call. This results in a total cost of $770 per contract as each contract represents 100 shares. This is also the maximum risk of your trade. Your maximum profit potential is $1230 per contract, calculated as the difference between the strike prices ($20) minus the net debit paid ($7.70), multiplied by 100.
4. Breakeven Point: Your breakeven point at expiration is $197.70. This is calculated by adding the lower strike price and the net debit paid.
5. Probability of Profit (POP): The estimated POP is 31.43%. This is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta.
6. Implied Volatility (IV) Rank: The IV Rank indicates where the current implied volatility stands in relation to the past year's high and low levels. It helps you identify whether options are currently expensive or cheap. A high IV rank indicates that options are more expensive, and a low IV rank indicates that options are cheaper.
7. Days to Expiration (DTE): There are 46 days left until the options expire.
Remember, while this trade setup could yield a profit if AAPL rises moderately, it also carries risk. The maximum loss, which is the premium paid, would occur if AAPL is below $190 at expiration. It's important to consider these factors and your own risk tolerance before entering this trade. Always ensure that any trade you enter aligns with your overall investment strategy and financial goals.
2) Bearish Credit Call Spread
If you believe that in the coming month and a half, the price of Apple stock will go lower, you could consider a bearish credit call spread. The current IV Rank of around 18.60% is a bit low to sell premium. But since there is a slight CALL skew (meaning that call options are more expensive compared to equidistant put options), it might be a good strategy to use this.
1. Strategy: The strategy you are considering is a Bearish Credit Call Spread on Apple Inc. (AAPL). This involves selling a call option and buying another call option with a higher strike price on the same underlying asset and with the same expiration date. You would use this strategy when you expect a moderate decline in the price of the underlying asset, AAPL in this case.
2. Trade Setup: In this particular setup, you are selling to open a call option on AAPL with a strike price of $190 and buying to open a call option with a strike price of $200. Both options expire on September 15, 2023.
3. Premium and Risk: You are receiving a net premium of $5.80 per share. This translates into a credit of $580 per contract (since each contract represents 100 shares) which is also the maximum profit for the trade. The maximum risk is $420 per contract. This is calculated as the difference between the strike prices ($10) minus the net premium received ($5.80), multiplied by 100.
4. Breakeven Point: Your breakeven point at expiration is $195.80. This is calculated by adding the lower strike price and the net premium received.
5. Probability of Profit (POP): The estimated POP is 31.49%. This is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta.
6. Implied Volatility (IV) Rank: The IV Rank for AAPL is 18.60%. While this is relatively low and usually not ideal for selling options, the slight call skew for AAPL options still makes this strategy potentially profitable. The call skew means that call options are more expensive compared to equidistant put options.
7. Days to Expiration (DTE): There are 46 days left until the options expire.
While this trade setup could yield a profit if AAPL falls moderately or stays below $190, it also carries risk. The maximum loss, which is the difference between the strike prices minus the premium received, would occur if AAPL is above $200 at expiration. It's important to consider these factors and your own risk tolerance before entering this trade. Always ensure that any trade you enter aligns with your overall investment strategy and financial goals.
Remember, with options, it's not about betting on the future, but rather strategizing for it.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...