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A Better Way to Play Apple Earnings

Simply put, from my perspective, you must be long-term bullish on the stocks you write covered calls and cash-secured puts on, particularly around earnings, because you could be left holding a stock at a loss.

Apple (AAPL - Get Report) reports on April 24. Because this comes after April's options expiration day (the last day to trade April monthly options is Friday, April 20), we'll look out to May for the trade.

If you are long-term bullish Apple and have cash on the sidelines to buy the stock, consider selling the Apple May $605 put. As of Monday's close, you would collect $18.40 ($1,840) in premium that you keep no matter what. If Apple breaches $605 between now and options expiration day, you run the "risk" of getting put shares and having to buy 100 shares of Apple for $605 apiece for every put you sold, regardless of Apple's market price. Because of the premium you received for writing the call, you would not start to lose money on this trade until Apple traded below $586.66 ($605 strike minus the $18.40 premium).

Of course, this trade anticipates a pullback in the stock. If you do not see that happening, you can always increase the strike price to something closer to or around-the-money. Again, just make sure you're comfortable buying the stock at that particular strike.

In the event that you get put shares, you could simply hang on to them and proceed as you would with any other stock transaction. But to keep the income train rolling, you could look out to June come mid-May and write out-of-the-money Apple covered calls against your position. When you select a covered call strike, you have to consider your cost basis on the stock and make certain that if you get your shares called away, you'll be happy with the price you're getting.

For instance, in this example, if you get put Apple at $605 (with a breakeven of $586.66), you'll want to use those numbers in conjunction with covered call strike prices to calculate your return in the event your shares get called away. Writing the Apple June $630 call would cap your profit at 4.1% using $605 as a cost basis and at 7.4% when you factor in the premium and use $586.66 as your cost basis.
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