Don't Sell Apple, Intel, Chipotle and IBM On Earnings; Do This Instead

NEW YORK (TheStreet) -- Earlier this week on TheStreet, I suggested investors looking to get long Apple (AAPL) consider selling put options ahead of earnings.

With the real possibility that Apple misses estimates when it reports next week, it makes sense to step back and proceed with caution.

If, however, you're already long the stock, selling puts might not make quite as much sense. And, if you intend to stay long the stock no matter what happens on earnings, you can still take an active approach to your position without necessarily trading it.

With as little as 100 shares of AAPL and commitment to a buy-and-hold strategy, you can generate considerable income from the stock, even if it does drop on earnings. For the record, you do not have to commit to a buy-and-hold strategy; I just approach the trade from that perspective.

Sell a covered call. It's quite possibly the most under-utilized -- and relatively simple -- investment strategy. That should be surprising, particularly after you see, firsthand, how easy and lucrative covered calls can be.

For every 100 shares of AAPL you own, you could, for example, sell the August $650 call and, as of Tuesday's close, collect about $6.85 in premium income. That's $685 in your pocket no matter what happens to the stock. (Options use a multiplier of 100).

If that call trades in-the-money (AAPL stock moves higher than $650) between now and option expiration day, you could have your shares called away. Your counterparty on the trade paid you for the right to buy your AAPL shares for $650 apiece. Chances are he or she will not exercise that option until expiration, though it could happen at any time before then.

If the call expires worthless (not in-the-money), you keep your shares. That brings up another point to think about when selling covered calls. Consider it in relation to selling Intel ( INTC) covered calls.

I own shares of INTC. During the day Tuesday, I considered writing the July $26 call against them. At the time I think I would have collected 35 cents per call sold. Not as lucrative as selling an AAPL call, but, relatively speaking, it's a great deal. Between dividends and covered calls, you can do well on a stagnant and choppy stock like INTC while you wait for it to break out.

I did not end up writing the call. Because my cost basis is right around $27, I did not want to risk losing my shares and taking a premature loss on the stock position.

Plus, even if I was up on-paper (when you factor in dividend and covered call income, I actually am), I am not ready to part with my INTC shares just yet. The last thing I wanted was for the stock to run and for my shares to get called away at $26 apiece.

Of course, I could always buy the call back to close the position, however two caveats come with that strategy.

First, if the stock runs, I might end up having to buy the call back for more than I paid for it to salvage my shares. Second, you play chicken with the possibility that you will not be able to buy the call back. Your counterparty might have exercised his or her option to buy INTC at $26 before you had the chance. That's always possible.

As such, it's important to assess the circumstances of your position before your implement a covered call strategy. While I have written and will continue to write calls against my INTC lot, there are times when I prefer not to pull the trigger. And, even if the time is right, you need to carefully decide which strike price you will go with on your call.

For example, imagine you are long IBM ( IBM). You expect the company to buck the trend and blow the doors off of earnings after the bell today. You think it will retest its 52-week high of $210 in short order. And you absolutely do not want to see your shares get called away.

In this case, you're better off waiting for the stock to run and IBM calls to increase in value alongside it. At strikes in the $200s, you can pick the one that suits your sentiment best.

Generally, if I have considerable on-paper gains on a stock, I rarely worry about it getting called away. In fact, you can use covered calls to get paid to sell stock. Consider Chipotle Mexican Grill ( CMG).

If you have owned that stock for six to 24 months or longer, you've likely done quite well with a buy-and-hold strategy. You're not necessarily bearish -- you actually remain bullish -- but you would not lose any sleep over taking money off of the table. That's where a covered call play ahead of earnings comes in.

At this juncture, you just need to ask yourself If CMG runs on earnings this Thursday, how much money am I willing to potentially leave on the table?

As of Tuesday's close, you could write the CMG August $400 call and collect $13.80 in premium. That means $1,380 in your pocket no matter what. That $13.80 also means that you do not leave money on the table, effectively, until CMG trades higher than $413.80. Even at that point, you have not actually lost anything until the counterparty exercises his or her option to buy CMG for $400 a share.

You can use covered calls in a variety of ways, tweaking strike prices and expiration months to suit your sentiment and gain/loss situation. No matter how you go about it, broadly speaking, investors are can be better off making use of covered calls. If you don't, you really leave money -- as close as the market comes to giving you "free" money -- on the table.

At the time of publication, the author was long INTC.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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