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How to Turn Apple's Stock Into an Income Stream

When you write a covered call, you always run the risk of losing your shares. This scares many investors. In some respects, it probably should. In the AAPL example, maybe you picked the $600 strike because you expected weakness, stagnation or only moderate upside in the stock post-earnings. Clearly, anybody who doubted Apple even a little this quarter was wrong (present company not excluded).

AAPL soared to $600 in after-hours trading. And chances are it will hover around that level or blast far past it between now and May's options expiration. But you will not necessarily lose your shares prior to expiration just because AAPL trades above $600. You could get them called away, but there's an equally as good, if not better chance, that you will not. If, however, AAPL trades above $600 at expiration, you are almost certain to have your shares called away. Brokerages automatically exercise an ITM option contract unless the contract owner instructs them otherwise.

If you're concerned, you could always buy the covered call back. This can turn into a money-losing proposition, though. Let's say the call you sold for $9.90 trades for $13. When you buy it back at that price, you end up losing $3.10, or $310. If AAPL retreated and the call option followed (I speak theoretically here because options do not always follow the trajectory of the underlying stock) and dropped to, say, $8, you could close the trade and bank a gross profit of $1.90, or $190.

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Personally, I am not a big fan of buying covered calls back after they have run away from me. This was a major topic of discussion last week in the Options Investing Newsletter I publish with fellow TheStreet contributor Robert Weinstein. Robert tends to feel a bit better about closing a covered call for a loss, but he's more of a short-term trader than I am.

When I select a strike to sell, I make sure I am happy with where I capped my return in the event I get my shares called away and the stock exceeds the strike price. If I get assigned, I happily give up my shares and bank a meaningful gain on the overall trade (realized gains on the stock and option leg of the trade). I like the sound of that much better, as a long-term investor, than taking a loss on the covered call to salvage my shares.

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