Apple shares have added $60 in two weeks—but one big option trader thinks that the shares have another $100 to go between now and August.
On Tuesday morning, the biggest trade in Apple was the purchase of 200,000 Apple shares and the sale of 2,000 August 565-strike calls for $2.04. This trade created a "covered call" position on Apple that can profit from Apple's upside until $565, and collects $2.04 in premium to ease the downside.
No matter what happens between now and August expiration, this trader will collect the $2.04 in premium received for selling these calls. This creates an annualized yield of 1.10% on the stock, which comes on top of the $12.20 Apple already pays in dividends, and pushes the stock's yield over 3 percent on an annual basis.
In return for this additional yield and downside cushion, this trader must forgo gains from owning the stock above $565, or 21.5 percent higher, if it jumps above there in the next 100 days. The trader is obligated to sell those shares for $565 apiece, even if they rise far above that level.
Apple is already up over 20 percent off of the 52-week low it made just 12 trading days ago. The shares have been helped by the dividend boost and share repurchase program announced last month.
This stock has always traded on momentum, and it finally appears though that the momentum has switched back to the upside again. The fact that the call in this buy-write was sold so far out of the money suggests that this trader believes that the stock has plenty of room to continue to run.
If the trader didn't see Apple rising much higher, the strategy would have been to buy a call that was less out of the money, and thus collect more premium.
The stock faces resistance around the $465 level, which coincides with a 23.6 percent Fibonacci retracement from the stock's all-time high to its 52-week low. The $465 level is also where the stock found its highs in March.
If the stock can break through this level it will confirm a shift in sentiment and momentum for the stock that could put it on track to rally into the upcoming product launches it hinted at during its earnings conference call.
This trader's target for the stock is $565 by the end of the summer. By buying the stock at $455 and selling the August 565-strike call, this trader is saying that he is willing to be called away from the stock there, and take his profits off of the table. However, the $2.04 downside cushion in this trade is not much considering Apple's daily volatility.
To put this trade on, you must be comfortable with the risk of simply owning Apple shares at these levels. And indeed, despite its recent run, I think Apple is still a buy, because I expect sentiment to continue to shift and momentum to build ahead of summer product launches.
After Apple announced earnings, we noted on this very blog that Apple was a much better risk-reward investment than a 30-year Treasury bond, and that trade has already paid off.
Thus, you have an opportunity to either close some bull positions—which I have done for winners on the short put positions I had—or, if you plan to stay long the stock, you can add some alpha to your position by selling this call. The catch is that you have to be comfortable with being called away another $100 higher from here.