Apple Inc (AAPL)

I have been considering undertaking a covered call strategy on AAPL.

For those who don't know what a covered call is, it involves buying or owning the stock (AAPL) and then selling or writing call options  against the position. A call option gives the owner of the option the right to buy a stock for a set price within a certain period of time. Just like an insurance contract, the price paid for an option is called the 'premium'. So, by selling a call option, one receives the premium fee upfront and gets to keep it regardless of what happens. However the seller of the premium is taking the risk the underlying share price may increase above the 'strike price' and therefore lose money. By owning the actual stock, the downside is limited, hence why it is called a 'covered' call strategy.

The benefit of a covered call strategy is that it allows an investor to generate additional income from their portfolio. There are downsides however, which I will come to shortly.

The reason I have been looking at AAPL in particular has been two reasons: firstly, because AAPL is a  fast moving stock, the option premiums are high (which is good if I am a seller or writer of options). Secondly, is that AAPL is cheap on historical numbers. Without going in to the figures in detail, at say US$500 per share (it's actually less in after market trading, but I'm keeping the numbers round) AAPL has a market capitalisation of $470bn. Estimated cash is ~$130bn. Net cash, AAPL trades on a historic PE of well less than 10, which for a technology company is wildly cheap. So the world's most valuable company is actually very 'cheap'. This presents us with a serious problem: do we assume AAPL's days are numbered or do we see this is a buying opportunity of a great company out of favour?

Personally I have been fence sitting. I've been sucked into situations like this before, especially writing covered calls on stocks just because the premium is good. This is a bit like the 'smell the cheese' prank. And I don't really know where AAPL will be in a number of years time. It is a great company with a strong 'eco-system' (love that term) but can it be destroyed? Certainly.

Recently announced sales figures have been disappointing relative to expectations, and the price continues its slide. In after hours trade as I write, the stock is down just shy of 10%. Markets hate missed expectations and there may be more to come. Any chartist will tell you AAPL is in a downtrend, and they are correct. It doesn't look like sentiment has got the point where it is fulfills Howard Marks quote "If I were asked to name just one way to figure out whether something is a bargain or not, it would be through assessing how much optimism is incorporated in its price", but it is certainly getting closer. 

For my money, I'm avoiding AAPL for the time being.