Apple (AAPL) - Optimizing Covered Calls

PREFACE

While covered calls are one of the most commonly used option strategies, it turns out we need to be clever in how we treat earnings in order to maximize the strategy in Apple Inc (NASDAQ:AAPL) .

STORY

It turns out there's a lot less 'luck' involved in successful option trading than many people realize and we're going to review that right now for AAPL. Let's first examine a two-year back-test of a covered call strategy with some simple rules:

* Trade monthly options (roll the trade every 30-days).
* Avoid earnings
* Test his strategy for two-full years

Here's how this quick set up looks in the back-tester:

If we do this test, it turns out the best covered call to sell is out of the money with a delta of 25. If the term delta is unfamiliar to you, we have cover at the end, but suffice it to say any delta below 50 is usually out of the money and certainly a 25 is out of the money.

WHAT DO WE SEE?

If we do a covered call in Apple Inc (NASDAQ:AAPL) , but always skip earnings we get these results:

 

That tile tells us two critical pieces of information. First, we see a very nice covered call result with a 24% return. But, just as important, we also see that the 24% return in the covered call considerably out-performs Apple Inc stock over the last two-years, which hit 8.3%.

In total we're looking at a 15.7% out-performance while taking less risk than owning the stock outright and always avoiding earnings risk.

EVEN BETTER

While out-performing the stock and avoiding the risk of earnings is a powerful implementation of a covered call, we actually did even better. Next we do the same back-test, but this time we only trade earnings. That is, we open our position two-days before earnings, let the event occur, and close the position two-days after earnings.

Here's the set-up -- very easy. Just click the appropriate buttons.:

And the results for that same 25 delta covered call:

Now we see why avoiding earnings was so powerful. Holding a covered call in Apple Inc (NASDAQ:AAPL) under-performed the stock and certainly under-performed a covered call that avoided this risk. In fact, our covered call strategy avoiding earnings beat the strategy held only during earnings by a whopping 31.8%.

TRADING TRUTHS

Going through this practice with AAPL reveals something more than just 'a cool back-test.' When we wrote that there's less 'luck' in successful option trading than many people know, we mean it. It's not about trying to guess stock movement. This whole idea of a 'options expert' is overly complicated in order to keep the information asymmetry in the favor of the top 0.1% at the expense of the rest of us.

Below, we go the final step (with a video).

WHY THIS MATTERS

When we wrote that there's actually a lot less 'luck' and a lot more planning in successful option trading than many people know, this is what we meant.

It's not about trying to guess which stocks will go up or down.

What the back-tester allows us to do is find calm, low stress stocks or ETFs (like SPY, QQQ, etc), and in this case, Nike, and find the option strategies that have created a high percentage of winning trades, gaining profitability slowly, while avoiding unnecessary risks - specifically, avoiding earnings.

In a five minute video, your entire view of the options world and what people mean when they say 'expert trader' will be turned upside down - to your advantage.

Tap here to see the CML Pro option back-tester.

Thanks for reading, friends.

Risk Disclosure

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.