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AAPL Options on CNBC

The tagline on CNBC’s Options Action show on Friday was something like Get Paid to Buy Apple Stock. Sound too good to be true? Take a look:

The show outlined a plan where you could buy an aapl call option that expires in December for about $2500 and simultaneously sell two call option contracts for about $2600. Specifically, the contracts looked like this at the close on Friday:

Buy this for $2520 ($25.20×100):
Strike Symbol Last Chg Bid Ask
380.00 AAPL111217C00380000 25.20 3.60 25.40 25.80

Sell two of these for $2690($26.90×100):
Strike Symbol Last Chg Bid Ask
410.00 AAPL111217C00410000 13.45 1.35 13.15 13.65

You immediately pocket the $100 and hope Apple climbs – but not too far. Why ?

Because the two contracts you sell in their transaction are for a strike price of $410. The one you buy is for a strike price of $380. So the contract you bought will gain value as it rises above $380, but your gains will be capped when the underlying stock price reaches $410. And there’s more:

You sold TWO contracts. For each of those sales you’re obligated to sell 100 shares for $410 each if the contract is executed. That’s 200 shares. The good news is that 100 of those shares are provided by the call option you bought. Hopefully you were holding 100 shares of aapl outright when you entered into this transaction so you can deliver the other 100 shares. They do mention on the show that this example is for current stock-holders looking to tweak their position. If you find a way to exit the position by buying back your call you can keep your shares. But keep in mind the price of the contracts you sold will rise with the underlying shares.

Like they say on the show, you make your profit above the strike price of the option you bought, but your profits are capped because of the contract you sold. Essentially, you want aapl to rise to $410 but no further. As aapl goes past $410 the 100 shares you held outright aren’t going for the ride – because the option you sold called them away.

You can watch the show here, they start talking about this some time past the 8 minute mark. So – what about their claim? Are you getting paid to buy Apple? Maybe you could look at it that way, but the caveats are quite substantial.

Regardless, I have little interest in this play at this time of year. Apple has the potential to make a decent run between now and the end of the calendar year. Look at what’s coming up: new iPhone launch, iOS5, iCloud, Earnings in October, Christmas shoppers waiting in line, China… The last thing I want right now is a cap on my holdings. It’s not Apple that might hurt the share price between now and January. It’s everything else in the economy that I’m worried about.

Past performance is no indication of future results, but take a look at the last two years and how aapl has done between September and January. Then add a reality check by looking at 2008.


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