Back to top

Writing Puts: An Alternative Way to Trade Apple

Read MoreHide Full Article

It seems like everyone is talking about where to buy Apple (AAPL - Free Report) .

And everybody seems to have their own price levels of where to do so. (Myself included.)

I, like so many others, own Apple. But I'm not interested in buying more until Apple hits its longer-term trendline, which currently comes in at around $450.

But, of course, there's no guarantee that Apple will even hit $450. And if it does, it could take many, many months.

But, if $450 is your price, you can set a buy limit order in the stock at that level, and once AAPL hits it, you'll be filled.

However, in the meantime, while you're waiting for your price to be seen, there's no money to be made in the stock until it gets there.

And if it never hits your price, it was a totally wasted effort.

Alternative Way to Play Apple

Instead of setting a buy limit order at $450, consider writing a put option at that level.

When you buy a put, you've bought the right to sell 100 shares of Apple, at your strike price.

When you sell (write) a put, you're essentially obligated to buy Apple at that strike price should it get there.

For that obligation though, you're paid a premium.

If Apple drops to that strike price and the buyer exercises the option, you'll have to buy 100 shares of Apple at that price. And you'll also get to keep that premium.

But if Apple never gets to that price, you won't get the stock, but you will get to keep that premium as your profit.

And you can do that over and over again.

Apple Put Writing Example

The January 450 put, for example, is currently going for 3.05 or $305.

If between now and January 18th, effectively the third Friday of the month, Apple stays above $450, you'll walk away with a $305 gain.

If, however, Apple does go down to $450, that option will be exercised and you'll finally own 100 shares of Apple at your desired price. But you'll also have made an additional $305, as you'll get to keep that premium as well.

No matter how you slice it, writing a put is always more profitable than simply placing a buy limit order and waiting because you'll also earn that premium.

And you can collect more premium by going to a further out month.

The February 450 put option, for example, is going for 6.65 or $665.

If between now and February 15th, Apple stays above $450, you'll walk away with a gain of $665.

And if it does go down there, you'll get the stock at your price and the premium as well.

You Don't Have to Want to Buy the Stock to Write a Put Option

If Apple goes down to your strike and you decided that you don't want to buy the stock anymore, you can simply buy that option back and you'll have no further obligation.

If it's near expiration, you'll likely be able to buy that option back at a profit and keep the overwhelming majority of the premium.

If there's lots of time left, you might have to buy it back at a loss, but once again, if you've decided you don't want the stock, it's a small price to pay to just opt out and be done with it.

Give put writing a try on Apple, or any other stock that you'd like buy at a cheaper price, and start making money while you wait.

You can learn more about different types of option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.

And be sure to check out our Zacks Options Trader.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Apple Inc. (AAPL) - free report >>

More from Zacks Know Your Options

You May Like