How To Invest In Apple (AAPL) Stock Using Options
Posted on 08 November, 2012 | 64 Comments
From Frontwater Capital’s Options Desk:
In a matter of weeks, Apple (AAPL) stock has fallen 25% from its September 2012 high of $704. Investors are now questioning if Apple has lost its magic touch. Just what has changed in only a few months.
Has Apple Lost Its Magic Touch?
Apple is no longer the underdog, the contender; they are now the company to beat – the ones with the target on their back. And while Apple continues to be known for its excellence, innovation and quality, life at the top is much more rigorous, and pressure bound than being second in command.
Factories are demanding higher wages and better working conditions that are putting pressure on margins. Competitors like Samsung are constantly improving their own phones, tablets and computers. Furthermore, we are starting to see limited sales of the iPhone 5 due to supply chain issues. And finally, the newly released mini Ipad was only warmly received by analysts who noted marginal, insignificant upgrades with the mini.
That said, Apple’s stock looks to be in bargain basement territory. Even with competitive pressures Apple’s gross margin remains above 40%. Most important is that Apple has an ecosystem that few others can rival. Apple users link and connect their Mac laptops, iPhone, and iPad so that, for example, a library of itunes can be automatically distributed to each gadget. This convenience factor makes it extremely difficult for users to switch to a new platform.
Finally, much of the sell off in Apple stock can be explained by the approaching ‘fiscal cliff’. Investors who have held Apple stock for some time are likely sitting on large capital gains and are wishing to realize their capital gains in 2012 prior to potential tax hikes in 2013. This is creating downward pressure on the stock. Yet the company remains intact.
Here are some different ways to play Apple in today’s sell off:
1. Go Long!
Apple has been the trade of the year and up until recently, momentum and speculation had taken the price sky high. Now, with the momentum going against Apple, we think it is an attractive entry point. Even if we forget about ANY growth, this company seems like a bargain — valued at 12.5 times earnings; with more than $120B in the bank; and zero debt.
2. Sell a Put
The panic in Apple today has created a great opportunity if you are willing to take on exposure to Apple if it continues to drop. The options market will pay you $19 between now and December if the stock were to drop below $525 and you sold a put. Your downside risk here is that you own Apple with an effective price of $506. On the other hand, if Apple stock trades above $525, you effectively pocket $19 in option premium.
3. Buy a Collar
If you were willing to take the on additional Apple shares with an effective cost of $506 from the above example, you could turn around and purchase a March 605 Call using the $19 dollars that you received from selling the put. This will give you upside on Apple and enable you to profit in the event that Apple’s stock rises above $605.
Bottom line is that if you believe in the company’s long term value, there are a bunch of different and creative ways to play Apple using option
64 Responses to “How To Invest In Apple (AAPL) Stock Using Options”
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