Writing Covered CallsIn my July 18 article, I said:
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).I brought this trade up with some context: You're long AAPL and bullish, but some downside in response to earnings would not surprise you. Covered calls work well in a long-term bullish, but near-term bearish or only moderately bullish situation. In essence, the income you generate from the covered call helps you bide your time and feel a bit better about the position during times of weakness or stagnation. Of course, anything could happen, but I feel relatively safe predicting that the August $650 call, now trading for about 40 cents, will expire worthless. There's no need to take your chances, however. It makes the most sense to buy the call back, close the trade and pocket about $645, based on the original premium collected of $6.85 minus the 40-cent buy back price, not including commission, for a roughly 94% profit. And you still have your AAPL shares. If you expect further stagnation, why not pick your spot somewhere between the August $575 and $600 calls? They fetch between $11.80 and $3.55, as of Wednesday's close. In any event, no matter what you think of Apple the company, AAPL the stock and the various shades of bullish or bearish sentiment towards both, you should always try to play it smart headed into an earnings report, particularly such an uncertain one. Basic options strategies, not directional bets akin to gambling, often make the most sense, particularly for long-term investors. Follow @RoccoPendola At the time of publication, the author did not hold a position in any of the stocks mentioned in this article. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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.