Surpass Buffett with Options Trading? Learn the Covered Call Strategy 📈

Warren Buffett's investment journey with $Apple(AAPL)$ began in early 2016 when $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ first purchased about 9.8 million shares, worth approximately $1.07 billion. Over the years, Buffett continued to increase Berkshire's stake in Apple.

Buffett recognized the value in Apple's strong brand, loyal customer base, and stable cash flow generation. Although known for investing in traditional sectors like insurance and consumer goods, Buffett saw the potential of Apple as a long-term investment.

This year, Berkshire significantly reduced its Apple holdings by selling around 116 million shares, cutting the year-end position to a market value of $135.4 billion, a 22% decrease from the end of 2023.

Buffett responded to the sale by stating it was for tax reasons due to the substantial gains from the investment, not a judgment on the stock's long-term prospects. In his view, Apple is likely to remain Berkshire's largest single stock by the end of this year.

Covered Call Strategy: A Buffett Favorite

A market-appropriate options strategy favored by both Buffett and Duan Yongping is the Covered Call strategy, which is quite straightforward. When you hold the underlying stock, you sell the corresponding call option, which is a long stock plus a short call.

This strategy is suitable for investors who are bullish on their stock holdings in the long term, do not wish to sell their shares, and expect the stock price to remain stable without significant spikes or drops. Selling appropriate call options over time can generate substantial income for the stock position. However, it's crucial to manage the risk when the stock price surges, as the options can cap profits.

If the stock price is above the strike price, there's a risk of having the shares called away. If the stock is one you particularly favor, you might be reluctant to part with it. Of course, if you don't want to lose the shares, you can buy back the call to close the position. Alternatively, you can immediately repurchase the shares from the market after they've been called away.

Covered Calls: How They Work and How to Use Them in Investing

Apple Covered Call Practical Example:

Let's take $Apple(AAPL)$ as an example. On May 6th, the closing stock price of Apple was $181.71.

Source: Tiger Brokers

If we sell a call option with a strike price of $195,expiring on June 7th,with a premium of $52.

Source: Tiger Brokers

This means we believe that $Apple(AAPL)$ will not rise above $195 before June 7th.

• If the stock price is < $195,we keep the entire $52 option premium.

• If the stock price is > $195, and Apple reaches $195 + $0.53=$195.53, we reach the breakeven point.

• If the stock price continues to rise > $195.52 ,and the counter party exercises the option, Apple shares will be taken away at $195.

• If the counterparty does not exercise, and we choose to continue holding the contract, for every $1 increase in the stock price,we will incur a loss of 100, with greater losses as the price rises higher.

A simple calculation shows that $52 represents 0.3% of the capital needed for 100 shares of Apple.

If Apple's price movement does not exceed 7.3% within a month, investors can earn this excess return.

If you consistently succeed in making such short calls for 12 months a year, you could achieve an excess return of 3.6%, outperforming Buffett by 3.6% annually!

Conclusion:

Covered Call can be a powerful strategy in the right market conditions, but it requires a careful approach to manage risks effectively. Are you ready to give it a try and potentially surpass Buffett's returns? Share your thoughts and strategies in the comments below!

#CoveredCallStrategy #OptionsTrading #InvestmentTips

Note: Options trading involves significant risk and is not suitable for all investors. Make sure to understand the risks involved and consider your investment objectives and level of experience before trading options.