Investing in Apple to $700

by Jay Pestrichelli on August 16th, 2012

A friend of Buy and Hedge e-mailed us an idea of how to play a bullish move from here in Apple (AAPL).  With the stock trading at $635, not so far from its all time high of 644, some might think the opportunity has been missed; especially since it was as low at $575 just a few weeks ago after what some thought to be disappointing earnings. 

However, the opinions around future products are strong. With the iphone 5 planned for September and IOS6’s upcoming release, the expectation is a turn around following the X-mas earnings period. There’s also more talk of Apple TV and the 7 inch ipad that may gain some traction in that time as well. Of course you can throw in there that the new ipad retina has yet to hit a holiday period which will be more than just icing on the cake.

This morning, Ycharts put out a write-up that Apple’s dying product lines, like ipods, are still outselling companies as large as Facebook. Apple sold $6 billion worth of ipods over the past 12 months which is down 33% since 2008. Its not surprising and not really a bad thing for Apple, as ipods have turned into the product you buy for kids that are too young for an iphone or ipad.  Naturally, this sets them up for future users of those higher ticket items. Essentially continuing the life cycle of users across all demographics.

All that added up, one may assume this product driven company will continue to extend its reach into the lives of everyday tech users as well as entrench itself with the younger demographic even sooner. This is what we consider as a illustration of strong fundamental market currents and justifies an investment vs. just a short-term trade in the company.

Even when we have strong convictions on these idiosyncratic plays, we are always looking to stay hedged. In this case, due to the expensive nature of Apple’s options, we’re gong to use a spread instead of a married put or ITM calls. A spread also allow us to enter into a long position without coming up with the $635 per share.

Two ways to do this, use a bull call spread or a bull put spread. Both will look very similar from a profit/loss perspective, so to keep it simple, we’ll go with the debit call spread.

Since we want to capture X-mas earnings we’ll go out to February expiration. If our upper limit is 700 use that as the upper strike and choose the lower strike of where you want to be hedged.

Our pal liked the 600/700 bull strikes, so here is what that position looks like
  • Long 1 Feb 600 Call
  • Short 1 Feb 700 Call
  • Net debit $44
  • Max Loss $44 per share @ or below $600 (5.5% downward movement)
  • Cost of Hedging $9 (annualized 2.8%)
  • Breakeven @ $644
  • Max gain $56 per share @ or above $700 (127%)
One note to remember about spreads, not only does the pricing matter, but so does the timing. So if Apple gets over 700 before February, the max gain may not be realized right away. However, if you’d like a little more time, the April spread of the same strikes will cost the same for the debit spread we just outlined.

All in all this is a pretty inexpensive and protected way to gain 10% as Apple continues to impress with its products and ability to deliver for Wall Street.


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1 Comments

Mick - August 20th, 2012 at 2:52 PM
9K winner in two days. Great pick Jay! Keep them coming.

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