Most investors view options as speculative and risky. To be sure, the derivatives blowup of 2008 was about mortgage backed debt, not exchange traded equity options. Some of the best investors in the world use options as insurance policies and many investors who bought put options against their holdings in 2008 saved their portfolios from a large draw down. In my view, buying put option insurance against your long book via IWM or QQQ put protection has merit.
With that said, many investors don't want to hedge their positions versus an index fund and would rather simply buy cheap stocks with good growth prospects. While I am worried that our structural unemployment problems will eventually reign in some of the growth of the tech sector as states move to tax online sales, anti-trust laws become more and more in focus, and markets in general start to price in a maturing industry, I do think that the tech space offers some value for investors.
Here are options trades on 3 of the best names in the space.
Microsoft (MSFT): Microsoft investors have had a wild ride of late. The stock has sold off substantially from the beginning of the year as shares have lost some 20% since the highs of six months ago in the $29 range. Investors who sold calls against their stock positions have largely broken even or have at least been able to mitigate their losses versus a strict buy and hold long only approach. While I like MSFT, I think that a covered call approach still makes more sense than buying the stock and holding the shares outright. Investors who wish to own the stock, collect their dividends, and make money from selling option premium can buy shares at around $25.20 and sell the July $25 call options for $.60 or so for a max gain of around 1.5% between now and July 16. While this caps your upside substantially, I think a covered call approach makes sense given the fact that Microsoft could remain choppy and flat over the summer months of trading, which for me are my least favorite of the year because of their choppy, low volume nature.
Investors, in my view, are better off selling the January 2012 $25 put options for $1.87 because this approach does not require the stock to actually rise for the position to make money. This approach actually creates a cash credit in your account which can be reinvested elsewhere. Likewise, selling the put options make a lot more sense than buying the stock for 401K investors who are not taxed based on short term or long term gains. Put selling for 401K investors and for insurance companies is a lower risk way to buy and hold stocks or to essentially place limit orders on stocks you want to own at lower prices, as these investors are basically paid to wait for their limit orders to be filled.
Google (GOOG): Google is under pressure these days because of their recent Anti-Trust case but we think that, like Microsoft's 1990's suits, these issues are likely a shorter term problem and not a longer term concern. Google is a cheap name at present with a 20% growth rate and a forward PE of only 12X earnings. While the Feds are suing Google for being too big, keep in mind that Google is one of the NSA's and the FBI's biggest assets as they have handed data over to the government at a 94% rate per request according to one article out today. I expect this rate to move higher, as Google will likely try to provide the government with any support that they can, given their legal troubles.
In the long run, I find it hard to believe that Google will be punished any worse than Microsoft was during their anti-trust ordeal. Investors looking to play Google options could sell a January 2012 $480 put option for $39 per contract which represents an 8.12% return over the next 7 months. With the stock down some 25% since recent highs at $620 or so, I feel this investment carries fairly low risk compared to many alternatives. To be sure, if Google drops below $441 per share, investors will be long the common stock but I feel at that price the shares are a solid long term buy.
Apple (AAPL): Apple has broken below some technical levels, but the stock looks very cheap at 11X forward earnings. While any slight miss could theoretically send the stock much lower in quick fashion, as long as Steve Jobs is alive I can't see the momentum of the underlying franchise slowing much, if at all, over the next few years. While AAPL is twice as large as Google, the company somehow does not have anti-trust issues in the same way. Apple is a strong company with a revolutionary product and even at a market cap that is 2.15% of GDP, the stock could march much higher if Jobs can hang in there for a few more years. Even without Jobs, Apple could in theory outperform the market if they can continue to innovate.
Apple options premiums are a bit less rich than that of Microsoft and Google, but still offer investors opportunity. If long investors who are very bullish on the name want to protect their position, buying the stock and buying a January 2012 $300 put option for $16 per contract looks like a wise investment. To add a layer of income to this investment, consider selling a July 16 $335 call option against AAPL for $5.80 a contract, which seems to me like a smart "calendar collar" spread trade, which can be heavily margined with at many of the largest online brokerage firms. Volatility is obviously a risk when using these positions, but I feel this type of collar trade is an extremely good way to make money over time from premium decay.
Disclosure: I am long GOOG, MSFT.
