Smart Investor - 3 Flexible options strategies to navigate Apple's next move

Apple's current setup

Apple’s stock has experienced significant growth over the past five years, as illustrated in the chart above. However, after hitting recent highs near $250, the stock has pulled back to around $223.33 as of January 21, 2025. With an earnings date set for January 30, implied volatility (IV) is currently at 28.96%, but what’s more notable is Apple’s IV rank of 61%.

An IV rank of 61% means the current level of IV is higher than it has been 61% of the time over the past year, indicating that options premiums are relatively elevated. Elevated IV rank benefits options sellers, as the premiums received are larger, making strategies like CSPs and ITM put selling particularly appealing in this environment.

Understanding the strategies

What is a cash secured put (CSP)?

A cash secured put involves selling a put option while holding enough cash to cover the purchase of the underlying stock if the option is assigned. For example, selling a $210 strike put on Apple means you commit to buying the stock at $210 if Apple’s price drops below that level at expiration. If the option expires worthless (Apple stays above $210), you keep the premium as profit.

Best for: Generating income in a neutral-to-bullish market.
How it works:

• If Apple remains above the strike price, the seller keeps the premium and has no further obligations.
• If Apple’s stock price drops below the strike price, the seller is obligated to buy the stock at the agreed-upon strike price. The effective cost basis is reduced by the premium received.

What is selling ITM puts?

Selling an in-the-money (ITM) put is another options strategy that allows investors to acquire Apple shares at a discount. ITM puts have a strike price above the current stock price, meaning they are more likely to be assigned. This strategy is often used by investors who want to own the stock but prefer entering at a reduced cost basis.

Best for: Acquiring stock at a reduced cost basis in a moderately bullish market.
How it works:

• If assigned, the seller buys Apple shares at the strike price. The premium received reduces the effective purchase price.
• If Apple’s stock price rises above the strike price, the seller still keeps the premium, but no stock is purchased.

What is buying bearish puts?

Buying a bearish put is a strategy used to profit from a decline in the stock price or to hedge against downside risks. By purchasing a put option, the buyer gains the right (but not the obligation) to sell the stock at the strike price before the option’s expiration. For example, buying a $255 strike put on Apple gives the buyer the right to sell Apple shares at $255, even if the stock price falls well below that level.

Best for: Protecting against downside risks or expressing a bearish view on the stock.
How it works:

• If Apple’s price falls below the strike price, the put gains value, allowing the buyer to sell the stock at a higher price than the market.
• If Apple’s price stays above the strike price, the option expires worthless, and the buyer loses the premium paid.

Comparing CSP, ITM puts, and bearish puts

Here’s a breakdown of the key differences between these three strategies:

Goal

• CSPs are used to generate income while being prepared to buy the stock if assigned.
• ITM put selling is aimed at acquiring shares at a discount while earning a premium.
• Bearish puts are designed to hedge against potential downside risks or profit from a decline in the stock price.

Market View

• CSPs are most effective in neutral-to-bullish market conditions.
• ITM put selling works best in a moderately bullish market.
• Bearish puts are suitable when you expect a significant drop in the stock price or want to protect against downside risks.

Risk

• For CSPs, the main risk is stock assignment at the strike price if the stock drops, which could lead to unrealized losses on the shares.
• ITM put selling carries a higher risk of immediate assignment and subsequent stock ownership if the stock falls below the strike price.
• With bearish puts, the risk is limited to the premium paid for the option, which will expire worthless if the stock price doesn’t fall enough to make the put profitable.

Premium Potential

• CSPs generate moderate premiums, as the strike is often near the current stock price.
• ITM put selling offers higher premiums due to the increased likelihood of assignment.
• Bearish puts do not generate premiums but instead require paying a premium upfront, as the goal is protection or speculation on a price decline.

Collateral Requirements

• Both CSPs and ITM put selling require holding enough cash to purchase the stock at the strike price if assigned.
• Bearish puts do not require collateral, as the risk is limited to the premium paid for the option.

Practical examples with Apple options

Important note: The strategies and examples provided in this article are for educational purposes only. They are intended to help shape your thought process but should not be replicated or implemented without careful consideration. The prices, premiums, and scenarios discussed are based on market data available at the time of writing and may no longer reflect current conditions. Every investor or trader must conduct their own due diligence and consider their unique financial situation, risk tolerance, and investment objectives before making any decisions. Investing in the stock market carries risk, and it’s crucial to make informed choices.

1) Cash Secured Put example: medium-term income generation

An investor could explore selling a $210 strike put with February 2025 expiry. Here’s how the numbers break down:

• Apple’s current price: $223.33
• Strike price: $210
• Premium: ~$2.75

How it works:
If Apple’s stock price stays above $210 at expiration, the put would expire worthless, and the seller would keep the premium of $2.75, resulting in a 1.31% return on the $21,000 collateral over about one month. If the stock price drops below $210, the seller would be obligated to purchase the stock at $210. Factoring in the premium received, the effective purchase price becomes $207.25 ($210 - $2.75).

2) In The Money Put example: short-term discounted stock purchase

Another approach is selling a $227.50 strike ITM put with January 2025 expiry.

• Apple’s current price: $223.33
• Strike price: $227.50
• Premium: ~$7.50

How it works:
If assigned, the seller would buy Apple shares at $227.50. After factoring in the premium, the effective purchase price becomes $220.00 ($227.50 - $7.50), offering a slight discount compared to the current price.

3) Bearish put example: long-term protection

An investor concerned about downside risks might consider buying a $255 strike put with June 2025 expiry.

• Strike price: $255
• Premium: ~$33.05

How it works:
If Apple’s stock price drops below $255, the put gains value. The breakeven point is $221.95 ($255 - $33.05).

Example outcomes:

• If Apple drops to $200, the put’s intrinsic value would be $55 ($255 - $200). After subtracting the premium, the net profit would be $21.95 per share ($55 - $33.05).
• If Apple stays above $255, the premium of $33.05 would be lost entirely.

Conclusion: The versatility of options for Apple investors

This article demonstrates the flexibility of options, even when using just one type of contract—a put. Whether your goal is to generate income, acquire Apple shares at a discount, or protect against downside risk, there’s a strategy tailored to your needs:

• Use CSPs to generate income while maintaining flexibility.
• Sell ITM puts to acquire Apple shares at a reduced price.
• Buy bearish puts to hedge against downside risks or express a bearish outlook.

Options empower investors to actively manage their portfolios, leveraging market conditions to align with their objectives while controlling risk and reward.