Earnings announcements attract traders who could care less if they’re trading the stock of a great company or tangerine futures…
A great way to turn this volatility to cash: Look to stocks that have bounced down temporarily, grab the shares and sell a call.
We now have several stocks that are so grossly undervalued, and were hit by traders due to earnings announcements that I liked, but the lemming traders on Wall Street did not.
The pick of the litter? Apple (AAPL).
Apple sold off due to a decline in revenue. Despite increasing unit sales of the iPhone, it increased market share in China and saw astonishing levels of profitability compared to all other maskers of smartphones, tablets and computers.
The stock is dirt cheap. Yes, it has sold at a P/E well below the S&P 500 multiple for years, not quarters. But rather than look at this as an unfortunate situation, it means you can, with a below-average capital risk, own the shares and sell calls every week or month to generate scads of cash.
Buy the shares at the current market price of roughly $92.75 and sell the May Week One 92.50 call for the price of $1.30.
One of two things can happen:
(1.) If you aren’t called out, you reduced your cost basis to $91.45 and generated an absolute rate of return of 1.40%. Do this 52 times a year and you have an annualized return north of 70%.
(2.) If you’re called out, you produce an annualized return of 79%.
Think about it…
(Michael Shulman owns Apple shares and sells calls.)