Optioning Apple Stock

This is the second in a series of posts about recent trades based on predictions that the market has bottomed. My previous trade on QQQQ (Nasdaq Index) calls was quite profitable in a short period of time, but with volatility falling the return to risk ratio from buying options on indexes is not as attractive. Hence, I have decided to play specific stocks that tend to be more volatile; on which options are more effective. Apple (AAPL) was a prime candidate.

Readers will know that I already own Apple Stock, bought at a much higher price, which I continue to hold long term. Here is the rationale behind the current purchase of the Apple call options and potential outcomes:

Why I am buying - Upcoming Drivers and Impact

1. Mutual funds are required to "close-out" their books by Oct 30 of each year, therefore all the tax loss selling should be over - POSITIVE.
2. AAPL is currently "cheap" vs. its historical valuation and analyst forecasts - POSITIVE.
3. I believe election excitement and expectation of new administration spending will give people hope and drive the market higher in November/December - POSITIVE.
4. The credit markets are starting to unfreeze which is good for the economy. Remember th e market is looking 6-9 months out - POSITIVE.
5. AAPL has had a year end "run-up" in most cases (into Q4 earnings report) for the last five years this trend should continue per the above points - POSITIVE.
6. We are still in a bear market and another sell-off may come (hard and fast) - NEGATIVE.
7. The Christmas shopping season may be really bad (although, I think that is already priced in) - NEUTRAL.
8. If you want ou t of your hedge fund by year-end, you are required to inform the hedge fund company by 11/15, therefore "forced" selling by hedge funds should stop after mid-November - NEGATIVE until 11/15. POSITIVE after that.

Exit Strategy and Possible Outcomes (based on stock movement)

Outcome 1 - The stock moves up $10 or so within the next month or so, and we get out after making a couple hundred dollars.

Outcome 2 - AAPL creeps up by $20 or so before year end and the underlying option price doubles, then get out with around $500 in profits.

Outcome 3 - Wait until right before the next earnings report (point 5 above) and hopefully it has run-up by $40 or so if previous trends continue, then we get out with close to $1,000.

Outcome 4 - The stock drops and we lose some or all of our investment! [Goes with the risks of options trading.]

Disclosure: The order for the April 2009 $190 AAPL calls was placed recently. 5 contracts were bought for an outlay of around $680. Options trading is a high risk trading strategy and should not be pursued until you are comfortable trading equities.

Comments

[Urbane Gori...:]

... And then there was the article in the SF Chronicle advising that Broadcom and other parts suppliers to the IPhone may get a hit as IPhone sales are down more than expected and Apple is slowing their orders.

jegan

2008 Nov 04 03:53 PM