How to Protect Your Stock Position in Apple

| About: Apple Inc. (AAPL)

It's fascinating how many articles are written about (or mention) Apple (NASDAQ:AAPL) in these pages. Will Apple go up? Will Apple go down? Is it a buy? Is it a sell? What will Apple do with its cash? How do you place a value on Apple? Perhaps the company will pay shareholders a dividend? Perhaps not. What are the future prospects for the company? What new products will it develop?

We remember IBM (NYSE:IBM) back in the 80s. Back then, if you didn't have IBM ... well you didn't have IBM.

There are a lot of Apple shareholders, although most are institutions. And the impressive, nearly continuous run up in the company's stock from March 2009 to the present has become an interesting barometer for fear and greed. Nobody wants to sell a good thing. However, nobody wants to unnecessarily risk any of that $330+ per share that investors have nervously shepherded over the last two years either. After all, Apple is already down about 10% from its February high. Can it go lower?

Let's face it. Investors are worried that in a general market sell off, or worse (a market collapse like what was seen in the late summer and fall of 2008), Apple would not be spared. Lest we forget, in five short months, from June to November, 2008 Apple lost 50% of its market cap. Presently, the concern that the market could sell off dramatically is real. With long term bonds trending up since February and the dollar showing signs of strength, the indicated direction for all stocks is probably down.

We haven't seen any articles informing Apple investors of what action they may take to sleep better during these long summer nights. So how do you:

  • Protect your investment in AAPL without having to sell it;
  • Put yourself into a position to possibly accumulate more AAPL at a much lower price; and
  • Not have it cost you the price of an iPhone?

Here's one way:

  1. Buy AAPL September 330 puts to cover your stock for 16.00; and
  2. Sell 2 AAPL January 270 puts for each September put you buy for 8.75 each.

This is how this may work out:

  • AAPL closes above 330.00 in mid-September and the September puts expire worthless. You will be exposed on the January 270 puts for four more months; and you should prudently monitor that circumstance and be prepared to address it (however, that is beyond the immediate scope of this article);
  • AAPL trades below 330.00 in mid-September and you sell the September puts, achieving dollar for dollar insurance protection down to 270.00 on your stock position. You continue to hold the January 270.00 short puts; and you will need to take action to address the additional risk that this circumstance may present (again, a hypothetical situation that is beyond the scope of this article);
  • AAPL trades below 270.00 and you risk having 200 shares of Apple stock put to you at that price in January for each 100 shares that you are protecting. However, you have bought 60.00 per share of protection on your existing Apple stock position.

Of course, many Apple shareholders would consider the opportunity to accumulate additional Apple stock at 270.00 a bargain. On the other hand, some may not. Apple may lose some of its polish at 270.00 or lower. A repeat of the 2008 decline of 50% for Apple would take it to about 180.00.

You can adjust the foregoing strike prices, the number of options that you buy and sell, or stagger the timing to fit your risk tolerance, your need for protection, your interest in possibly accumulating more Apple stock at a significantly lower price, and your personal outlook for the market. Flexibility is one of the chief advantages of using options as a trading tool, and this is a good example.

As structured, and assuming all options expire worthless by mid-January (Apple stays above 330.00), this trade can presently be done at a 1.50 credit. In other words, you are paid 1.50 per share to purchase insurance protection that you will not have needed. We like trading like that; and as our old pappy used to say, “it's better to have it and not need it, than need it and not have it."

So if you don't have insurance protection for your Apple ... well ...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.