I have owned Apple (AAPL 1.81%) for many years. The tech titan has grown into my top holding. While my Apple position is only 4% of my total investment portfolio, it's a whopping 27% of my ROTH IRA. I'd like to lower my exposure in that account.
However, instead of selling some of my Apple stock, I'm using it to make passive income through a unique strategy. Here's a look at my trade and how you can more easily mimic this income strategy through a passive investment in an exchange-traded fund (ETF).
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My Apple trade
I own more than 100 shares of Apple. That allows me to sell call options on a portion of my shares. This strategy generates income because I receive the option's value (premium) as a credit when I short it. This trade has a few potential outcomes:
- If shares are below the strike price of my option at expiration (I wrote $280 calls that expire in May), it will expire worthless, enabling me to keep 100% of the income. I can then write new call options.
- If shares are above my strike price as expiration approaches, I can roll the option forward, often at a credit, to generate additional option premium income. Alternatively, I can let my shares get called away if I don't want to continue holding them.
The main risk of this trade is that Apple's stock price soars well past my strike price and my shares get called away. However, it's a trade-off I'm willing to make, since it would still be a better outcome than selling at the current lower share price.
NASDAQ: AAPL
Key Data Points
The second part of my strategy is to reinvest the options income generated by this trade into other stocks, thereby reducing my exposure to Apple in this account. I have been investing the options income in high-quality dividend-paying stocks because they provide me with passive income that I can reinvest to reduce my exposure to Apple.
An easier way to generate options premium income
My Apple options trade is very repeatable. I've already completed several successful trades over the past few years, generating substantial income. While it's not as passive as other income strategies -- such as investing in dividend stocks or ETFs -- since I have to actively monitor and manage the options, the income I'm generating has made the extra effort worth it to me.
However, not everyone has the time to learn options trading or manage their positions. That's where ETFs can help. Several ETFs have strategies designed to generate options premium income.
For example, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.47%) has a simple mandate. It aims to deliver monthly distributable income and Nasdaq-100 exposure with lower volatility. The fund has a two-pronged investment strategy to achieve its mission:
- Disciplined options overlay strategy: The fund's managers write out-of-the-money (above-the-current market price) call options on the Nasdaq-100 index. This strategy generates options premium income that the fund distributes to investors each month.
- Underlying equity portfolio: The fund holds a portfolio of stocks selected based on fundamental research and data science. Of note, Apple is its second-largest holding at 6.1%
NASDAQ: JEPQ
Key Data Points
The JPMorgan Nasdaq Equity Premium Income ETF's strategy provides investors with a lucrative monthly income stream. Over the last 12 months, it has delivered a robust 11.3% income yield. While the distribution payment will rise and fall based on the options premium income it generates, the income yield has historically been well above what you can generate from most other asset classes.
Additionally, the fund offers the potential for price appreciation from its equity portfolio. Since its inception in 2022, the ETF has delivered an average annualized total return of 16.4% (income distributions plus price appreciation). Investors get all this passive options income and upside potential for a reasonable cost (0.35% ETF expense ratio).
The option to generate income
I like to sell call options to generate income on large holdings like Apple. While it's a more active investment strategy, the additional income makes it worth it for me. I also like the more passive approach of investing in an options-focused ETF like JEPQ. That fund enables me to collect passive income as its managers write call options on the Nasdaq-100 index, while also benefiting from the price appreciation potential of its holdings. It's a great way to capture income and upside potential from high-quality companies like Apple.
