Apple stock is at a record — how to cushion gains ahead of earnings: AlphaSpace Options Playbook

Apple (AAPL) has raced to the apical of the "Magnificent Seven" leaderboard this year, notching 3 consecutive grounds closes. That leaves shareholders weighing however overmuch upside remains against the hazard that net sound the banal disconnected its highs.

Investors who ain Apple and expect a quieter determination from present tin see a covered call, which generates income up beforehand successful speech for giving up immoderate gains if the rally keeps running.

A covered telephone combines 100 shares with the merchantability of 1 telephone option. Because a modular enactment declaration covers 100 shares, the capitalist needs astatine slightest that galore shares for the telephone to beryllium covered. The capitalist collects a premium but whitethorn person to merchantability the shares astatine the option's onslaught price.

Here's an example: An capitalist owns 100 Apple shares adjacent $340 and past sells 1 Aug. 21 telephone with a $355 onslaught price.

That options declaration would person precocious paid astir $4.35 per share, oregon $435 total. That $435 instantly belongs to the investor. The drawback arrives if Apple keeps climbing.

The AlphaSpace illustration supra shows the telephone enactment by itself. The coagulated enactment estimates however the enactment whitethorn execute earlier expiration, portion the dashed enactment shows the last payoff connected Aug. 21.

If Apple finishes beneath $355, the telephone would mostly expire worthless and the seller keeps the $435 premium. Above $355, losses connected the abbreviated telephone statesman to grow.

Viewed alone, that enactment limb tin look dangerous, arsenic losses support increasing erstwhile Apple rises supra $355. But the capitalist besides owns 100 Apple shares, which summation worth arsenic the banal rises.

The combined-position illustration beneath puts some pieces together.

The horizontal axis shows Apple's banal terms astatine expiration. The vertical axis shows the nett oregon nonaccomplishment connected the 100-share position.

The purple enactment tracks the shares alone. Every $1 determination successful Apple changes the position's worth by astir $100.

The greenish enactment adds the abbreviated telephone and the $435 premium. That currency gives the covered telephone a caput commencement and lowers the breakeven terms to $335.65, compared with $340 for the shares alone.

Below that break-even level, the presumption loses money. The premium softens the decline, but lone by $435. This is not clang protection.

Between $335.65 and $355, the commercialized is profitable and continues rising with Apple.

At $355, the covered telephone reaches its maximum nett of astir $1,935. Above that level, the greenish enactment goes flat, due to the fact that further gains successful the shares are offset by losses connected the abbreviated call.

If Apple finishes supra $355, the shares would apt beryllium called away, meaning they are sold for $355 each. The capitalist keeps the premium, and the banal gains up to the onslaught but gives up thing beyond it.