Trading Strategy Recap
• Starting Position: Hold 500 shares of Apple Inc. (AAPL) stock.
• Covered Calls:
Sell weekly call options on all 500 shares.
Strike Price: 7% above the current stock price each Monday.
• Cash-Secured Puts:
When shares are called away, sell weekly put options.
Strike Price: 5% below the price at which shares were called.
Cycle: Repeat this process throughout the year.
Assumptions for 2025
1. Apple Stock Price Movement in 2025:
Starting Price: Let's assume Apple stock starts at $250 per share in 2025.
Expected Annual Growth Rate: We'll project a 15% annual growth, reflecting a bullish outlook.
Weekly Stock Price Increase: Approximately 0.28% per week (compounded weekly).
Weekly Volatility: Assume a standard deviation of 3% to account for potential fluctuations.
2. Option Premium Estimation:
Implied Volatility (IV): Average of 35% for AAPL weekly options, reflecting higher volatility.
Risk-Free Interest Rate: 2% per annum.
Option Pricing Model: Black-Scholes formula for estimating premiums.
3. Trading Strategy Parameters:
Covered Calls:
Sell weekly call options with strike prices 7% above the current stock price each Monday.
Cash-Secured Puts:
When shares are called away, sell weekly put options with strike prices 5% below the
call-away price.
Position Size: Always dealing with 500 shares or equivalent option contracts (5 contracts).
4. Transaction Costs and Taxes:
Transaction Costs: Ignored for this estimation.
Taxes: Ignored, as they depend on individual circumstances.Simulation of the Strategy Over One Year
Week 1
• Stock Price (S): $250.00
• Covered Call Strike Price (K): $267.50 (7% above $250)
• Time to Expiration (T): 1 week (~0.0192 years)
• Option Premium Calculation:
Using Black-Scholes, estimated premium ≈ $1.25 per share
• Premium Collected: $1.25 * 500 shares = $625
• Stock Movement: Assume a 0.28% increase plus a random fluctuation of -2%.
New Stock Price: $250 * (1 + 0.0028 - 0.02) = $245.70
• Outcome:
Stock price ($245.70) is below strike price ($267.50); options expire worthless.
Shares Retained.
Weeks 2 to 8
• Repeat the process from Week 1.
• Average Weekly Premiums Collected: Approximately $625.
• Cumulative Premiums After Week 8: $625 * 8 = $5,000
• Stock Price Fluctuations:
Assume mixed weekly movements due to market volatility.
Stock price remains below strike prices; options expire worthless each week.
Week 9
• Stock Price (S): Let's say after several weeks of fluctuations, the stock price is $260.00.
• Covered Call Strike Price (K): $278.20 (7% above $260)
• Option Premium Calculation:
Estimated premium ≈ $1.35 per share
Premium Collected: $1.35 * 500 = $675
• Stock Movement: Stock surges by 8% due to positive news.
New Stock Price: $260 * 1.08 = $280.80
• Outcome:
Stock price ($280.80) exceeds strike price ($278.20); options are exercised.
Shares Called Away at $278.20 per share.
Capital Gain on Stock:
Purchase Price: $250.00 per share
Selling Price: $278.20 per share
Gain per Share: $278.20 - $250.00 = $28.20
Total Gain: $28.20 * 500 = $14,100
• Cumulative Premiums by Week 9: $5,000 + $675 = $5,675
Week 10
• Cash-Secured Put Strike Price (K): $264.29 (5% below $278.20)
• Option Premium Calculation:
Estimated premium ≈ $1.50 per share (higher due to increased volatility)
• Premium Collected: $1.50 * 500 = $750
• Stock Movement: Stock decreases by 5%.
New Stock Price: $280.80 * 0.95 = $266.76
• Outcome:
Stock price ($266.76) is above put strike price ($264.29); options expire worthless.
No Shares Purchased.
Week 11
• Sell Cash-Secured Puts Again:
Strike Price (K): $264.29
Premium Collected: $1.50 * 500 = $750
• Stock Movement: Stock decreases by 3%.
New Stock Price: $266.76 * 0.97 = $258.76
• Outcome:
Stock price ($258.76) is below put strike price ($264.29); options are exercised.
Shares Purchased at $264.29 per share.
• Cumulative Premiums by Week 11: $5,675 + $750 + $750 = $7,175
Weeks 12 to 52
• Repeat Covered Call Strategy:
Strike Price: 7% above the current stock price each week.
Option Premiums: Average around $1.40 per share due to higher stock price and volatility.
Premiums Collected: $1.40 * 500 = $700 per week.
• Assuming Shares Are Not Called Away Again:
Total Premiums for Weeks 12-52: $700 * 41 = $28,700
• Stock Price Movement:
Assume moderate growth with occasional fluctuations.
Stock ends the year at approximately $290.00 per share.
Total Estimated Results After One Year
1. Option Premiums Collected:
o Weeks 1-8 (Covered Calls): $625 * 8 = $5,000
o Week 9 (Covered Call): $675
o Weeks 10-11 (Cash-Secured Puts): $750 * 2 = $1,500
o Weeks 12-52 (Covered Calls): $700 * 41 = $28,700
o Total Premiums: $5,000 + $675 + $1,500 + $28,700 = $35,875
2. Capital Gains:
o Sale of Shares in Week 9:
▪ Gain: $14,100 (as calculated earlier)
o Cost to Repurchase Shares in Week 11:
▪ Purchase Price: $264.29 per share
▪ Total Cost: $264.29 * 500 = $132,145
o Unrealized Gain on Repurchased Shares:
▪ Stock Price at Year-End: $290.00 per share
▪ Gain per Share: $290.00 - $264.29 = $25.71
▪ Total Unrealized Gain: $25.71 * 500 = $12,855
3. Total Profits:
o Option Premiums Collected: $35,875
o Capital Gains Realized: $14,100
o Unrealized Gain on Repurchased Shares: $12,855
o Total Estimated Profit: $35,875 + $14,100 + $12,855 = $62,830
Analysis
• Annual Return on Initial Investment:
o Initial Investment: 500 shares * $250 = $125,000
o Total Profit: $62,830
o Return Percentage: ($62,830 / $125,000) * 100% ≈ 50.26%
• Factors Contributing to Profitability:
o Option Premiums: Significant income from selling options throughout the year.
o Capital Gains: Realized profit when shares were called away.
o Stock Appreciation: Appreciation of repurchased shares added to overall gains.
• Risks and Considerations:
o Market Volatility: Fluctuations in stock price could affect the timing of assignments and the
profitability of options.
o Opportunity Cost: If the stock price surges significantly, covered calls may cap potential gains.
o Assignment Risks: Frequent assignments could result in increased transaction costs (ignored
here) and complex tax situations.
o Holding Periods: The timing of buying and selling shares can impact short-term vs. long-term
capital gains taxes.
Potential Variations
• If the Stock Had Declined:
o Option Premiums: May have been lower due to decreased stock price and possibly lower
implied volatility.
o Capital Losses: Potential losses if shares are repurchased at higher prices and then decline.
o Overall Profitability: Could decrease significantly, possibly resulting in losses despite premium
income.
• If Shares Were Called Away Multiple Times:
o Additional Capital Gains: Realized gains each time shares are called away.
o Increased Cash-Secured Puts: More opportunities to collect premiums from selling puts.
o Complexity: More transactions to manage and potential for increased costs.
Conclusion
Based on the assumptions and calculations:
• Total Estimated Profit: $62,830
• Annual Return: Approximately 50% on the initial investment of $125,000.
This strategy could potentially yield substantial returns through a combination of:
• Consistent Option Premiums: Approximately $35,875 over the year
• Capital Gains from Shares Being Called Away: $14,100 realized.
• Stock Appreciation on Repurchased Shares: $12,855 unrealized gains.
Final Thoughts and Recommendations
• Market Dependence: The success of this strategy heavily relies on market conditions and stock performance.
• Risk Management: Be prepared for scenarios where the stock may decline, affecting both the value of holdings and the profitability of options.
• Tax Implications: Frequent trading and option transactions can have complex tax consequences. It's important to understand how short-term capital gains taxes might impact net returns.
• Transaction Costs: In a real-world scenario, brokerage fees and commissions could reduce overall profitability.
• Professional Advice: Consider consulting with a financial advisor or tax professional to tailor the strategy to your specific financial situation and to navigate regulatory considerations.
• Active Management Required: This strategy necessitates regular monitoring and management to adjust to market changes and to make timely decisions regarding option sales and stock positions.
Disclaimer: This estimation is based on hypothetical data and assumptions for illustrative purposes only. Actual
market conditions, stock performance, and option premiums may vary. This analysis should not be considered
financial advice. Before implementing any trading strategy, it's advisable to conduct thorough research and
consult with financial professionals.
