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Investing with options - Apple Inc - wind down or load up?
Koen Hoorelbeke
Investment and Options Strategist
Summary: In a market filled with uncertainty and the looming potential of stagflation, investors in big tech stocks such as Apple may be contemplating strategic adjustments. This article delves into two key options strategies tailored for different market views. For those considering reducing their tech exposure, selling in-the-money (ITM) calls on AAPL is explored as a way to methodically unload shares while collecting premium. Conversely, if looking to capitalize on growth opportunities, selling ITM cash-secured puts is presented as a way to potentially acquire AAPL shares at favorable prices.
Investing with options - Apple Inc. - wind down or load up?
In a market environment tinged with uncertainty and the potential for stagflation (see links below), investors holding big tech stocks such as AAPL, MSFT, META, GOOGL, NVDA, TSLA may be considering adjustments to their portfolios.
Related articles:
Whether you are optimistic about future growth or cautious about potential downturns, options can offer targeted strategies to align with your market view. In this article, we'll focus on Apple and explore two key techniques that can be applied to other major tech names as well.
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.
1. Unloading shares: selling in-the-money (ITM) calls
For investors already holding positions in Apple (AAPL) and contemplating a rebalancing strategy to align with changing market conditions or investment goals, selling in-the-money (ITM) calls can offer a tactical approach. This technique provides a structured path to sell part or all of your AAPL holdings at a predetermined price, while also generating immediate premium income. Whether seeking to reduce exposure to the tech sector or simply looking to unlock value from existing holdings, this strategy caters to those ready to make calculated adjustments to their portfolio.
If you believe that AAPL or other tech stocks may face headwinds, you might consider reducing your holdings. Selling ITM calls can be a strategic way to do this:
• Strategy: Sell ITM call options against existing AAPL shares.
• Objective: Obligate yourself to sell AAPL at a predetermined price, collecting a premium in the process.
• Risk Profile: If AAPL rises above the strike price, you'll sell at that price, potentially missing out on additional gains. If AAPL falls, the premium received provides some cushion.
• Application: This strategy can be replicated across other tech stocks, allowing you to unload shares methodically.
Let's look at an example:
Selling an in-the-money (ITM) call option on AAPL with a strike price of $175 and an expiry date of August 18th, 2023, can result in different outcomes depending on AAPL's price at expiration. Here's a detailed breakdown of the scenarios:
Scenario 1: AAPL closes above $175 at expiration (up)
If AAPL closes above the strike price of $175 at expiration, the call option will be exercised, and the following will occur:
- Obligation to sell: You will be obligated to sell 100 shares of AAPL at the strike price of $175 per share.
- Premium collected: You will keep the premium of $4.05 per share ($405 for one contract) that you received when selling the call.
- Net sale price: Your effective sale price per share will be $175 + $4.05 = $179.05, slightly above the current price of $177.97.
- Profit or loss: Depending on your original purchase price for AAPL, the net sale price might represent a profit or loss on the underlying shares. The premium collected will add to your gains or mitigate any loss.
Scenario 2: AAPL closes at or below $175 at expiration (down)
If AAPL closes below the strike price of $175 at expiration, the call option will expire worthless, and the following will occur:
- No obligation to sell: You will not be obligated to sell any AAPL shares, as the option was not exercised.
- Premium collected: You will keep the entire premium of $4.05 per share ($405 for one contract) that you received when selling the call.
- Continued ownership: You will continue to own the AAPL shares, but their market value may be less than when you sold the call, depending on how far below $175 AAPL closes.
- Cushion against decline: The premium collected serves as a cushion against the decline in AAPL's share price, effectively reducing your downside risk.
- Premium collected: You will keep the entire premium of $4.05 per share ($405 for one contract) that you received when selling the call.
- Continued ownership: You will continue to own the AAPL shares, but their market value may be less than when you sold the call, depending on how far below $175 AAPL closes.
- Cushion against decline: The premium collected serves as a cushion against the decline in AAPL's share price, effectively reducing your downside risk.
Conclusion
Selling an ITM call option on AAPL with a strike price of $175 can be an effective strategy for investors looking to potentially unload shares at a favorable price or collect premium as income. The outcomes vary depending on AAPL's closing price at expiration, either resulting in the sale of shares (if above $175) or retention of shares with premium income (if below $175).
2. Acquiring more shares: selling in-the-money (ITM) cash secured puts
For investors with a bullish outlook on Apple (AAPL) and a desire to expand their holdings at favorable prices, selling in-the-money (ITM) cash-secured puts can be an astute strategy. This technique aligns with a growth-oriented approach, allowing you to potentially acquire AAPL shares at a discount to current market levels while also collecting premium income. Whether aiming to capitalize on perceived undervaluation or simply seeking to increase exposure to the tech giant, this strategy provides a controlled method to add more AAPL shares to your portfolio, reflecting confidence in the company's future prospects.
If you are bullish on AAPL (or other tech names) and want to increase your holdings, selling ITM cash-secured puts can be a way to acquire shares at a discount:
• Strategy: Sell ITM put options, setting aside the necessary cash to buy AAPL if assigned.
• Objective: Potentially buy AAPL at a lower price than current market levels, while collecting a premium.
• Risk Profile: If AAPL falls below the strike price, you'll be obligated to buy. If AAPL rises, you keep the premium without buying the shares.
• Application: This technique can also be applied to other tech stocks, allowing you to acquire shares at favorable prices.
Let's look at an example:
Selling an in-the-money (ITM) cash-secured put option on AAPL with a strike price of $182.5 and an expiry date of August 18th, 2023, can lead to different outcomes depending on AAPL's price at expiration. Here's a detailed examination of the scenarios:
Scenario 1: AAPL closes at or above $182.5 at expiration (up)
If AAPL closes above the strike price of $182.5 at expiration, the put option will expire worthless, and the following will occur:
- No obligation to buy: You will not be obligated to buy any AAPL shares, as the option was not exercised.
- Premium collected: You will keep the entire premium of $5.15 per share ($515 for one contract) that you received when selling the put.
- Result: You profit from the premium collected but do not acquire any AAPL shares.
- No obligation to buy: You will not be obligated to buy any AAPL shares, as the option was not exercised.
- Premium collected: You will keep the entire premium of $5.15 per share ($515 for one contract) that you received when selling the put.
- Result: You profit from the premium collected but do not acquire any AAPL shares.
Scenario 2: AAPL closes below $182.5 at expiration (down)
If AAPL closes below the strike price of $182.5 at expiration, the put option will be exercised, and the following will occur:
- Obligation to buy: You will be obligated to buy 100 shares of AAPL at the strike price of $182.5 per share.
- Premium collected: You will keep the premium of $5.15 per share ($515 for one contract) that you received when selling the put.
- Net purchase price: Your effective purchase price per share will be $182.5 - $5.15 = $177.35, slightly below the current price of $177.97.
- Result: You acquire AAPL shares at a net price that may represent a discount compared to the market price when you sold the put. However, if AAPL has fallen significantly below $182.5, the purchase price could be above the current market value at expiration.
- Obligation to buy: You will be obligated to buy 100 shares of AAPL at the strike price of $182.5 per share.
- Premium collected: You will keep the premium of $5.15 per share ($515 for one contract) that you received when selling the put.
- Net purchase price: Your effective purchase price per share will be $182.5 - $5.15 = $177.35, slightly below the current price of $177.97.
- Result: You acquire AAPL shares at a net price that may represent a discount compared to the market price when you sold the put. However, if AAPL has fallen significantly below $182.5, the purchase price could be above the current market value at expiration.
Conclusion
Selling an ITM cash-secured put option on AAPL with a strike price of $182.5 can be an effective strategy for investors looking to potentially acquire shares at a predetermined price while also collecting premium income. The outcomes vary depending on AAPL's closing price at expiration, either resulting in the acquisition of shares (if below $182.5) or retaining the premium without buying the shares (if above $182.5).
This strategy can be particularly appealing to investors who are bullish on AAPL and would like to increase their holdings at a potentially favorable price. It is essential to have the necessary cash to cover the purchase if the option is exercised.
Final thoughts
These two strategies offer clear paths for investors looking to adjust their tech portfolios in line with their market views. Whether unloading shares through selling ITM calls or acquiring more through selling ITM cash-secured puts, options provide flexibility and opportunities for premium collection.
For further context on the broader economic landscape, please refer to the linked research on stagflation.
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.
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