4 Stocks And Apple Options: Battle Of The Investment Strategies

Includes: AAPL, AEP, AMZN, HCP, P, RCI, VZ
by: SA Editor Rocco Pendola

Throughout the second half of 2011, I used up a fair bit of Seeking Alpha real estate to brag about the $10,000 portfolio's performance.

But, as the world's greatest man recently wrote, the time has come to let the past be history. It takes brass ----s to sell real estate. And I'm certainly not going to continue to do a very good job at it by beating the same drum.

So, we're making a change uptown here at the Santa Monica headquarters and proceeding in dramatically different fashion with this experiment.

In my most recent $10,000 portfolio update, I not only reported that it's flush with $32,770 worth of cash, I highlighted several changes to expect for 2012. Feel free to review them at the above-linked story, but, in a nutshell, I will mix a more conservative approach to investing with my enduring speculative side. You can also read a bit more about my mindset in the article, 4 Stocks For A Somewhat Less Stressful 2012.

I'm also adding two more wrinkles to the mix for 2012:

  • I will no longer trade, via stock or options, the two companies that generated a majority of the $10,000 portfolio's profits in 2011, Netflix (NASDAQ:NFLX) and Research In Motion (RIMM). While I will still cover these stocks and write about them in other articles, they're off limits for $10,000 portfolio purposes.
  • Not only will I hold more of the positions in this simulated portfolio in real life, but I will present each in at least two different ways. Comparing strategies should bring more value to these articles, as they'll go beyond mere stock picking and options education.

The Core Holdings

In real life, I am adding the following stocks to the core of my mostly buy-and-hold personal portfolio. In that portfolio, I will dollar cost average into these stocks, on a regular schedule, throughout the year. While my real-life buys will not mirror my simulated buys (they'll be smaller, but potentially more frequent), they're still somewhat representative of one another.

The twist for the $10,000 portfolio - I will compare the performance of dollar cost averaging into these stocks against making a one-time, lump-sum purchase. While I might not publish an article reflecting the trade on the same day, I will make each dollar cost average purchase on the 20th of each month or on the closest trading day.

Company (Ticker) Lump-Sum Investment Lump-Sum Price (Shares) DCA Investment DCA Price (Shares)
American Electric Power (NYSE:AEP) $6,000 $39.70 (151.1) $500 $39.70 (12.6)
HCP, Inc. (NYSE:HCP) $6,000 $39.35 (152.5) $500 $39.35 (12.7)
Rogers Communications (NYSE:RCI) $6,000 $36.91 (162.6) $500 $36.91 (13.5)
Verizon Communications (NYSE:VZ) $6,000 $39.04 (153.7) $500 $39.04 (12.8)
Click to enlarge

A few thoughts. I did not include AEP in my four stocks for a less stressful 2012 article, but I did open a DCA position in the stock this month in my personal portfolio. I've been looking for a growing utility to own with a nice yield - something like Wisconsin Energy (NYSE:WEC), which I owned through the late 1990s, and AEP fits the bill.

Of course, I will factor in dividend payouts for each stock as they occur. I have yet to take a position in Pandora (NYSE:P) in this incarnation of the $10,000 portfolio because I'm hoping to pick up shares at a slightly lower price. But, even more than that, I want to put some of my speculative money to work elsewhere on a trade with a shorter time horizon.

Speculative Plays On Apple (NASDAQ:AAPL) Earnings

I'm with fellow Seeking Alpha contributor Andy Zaky. It's tough to bet against the guy considering how well he knows Apple. Zaky expects a blowout quarter for the company and I agree. Two companies will blow the doors off of revenues in the Q4 holiday shopping season - Apple and Amazon.com (NASDAQ:AMZN). That much is pretty clear, probably even to AMZN bears. With the exception of a retailer or two on the low-end and a few on the high-end, the Best Buy's (NYSE:BBY) of the world will accept the scraps and like it.

AAPL represents the trade over this time frame, not AMZN. As much as I like Amazon, I do not want to fight the bearish sentiment that overhangs the stock. While the company could very well set off the short squeeze of a lifetime with surprising Q4 numbers, the margin and EPS drag lots of people expect could come. AMZN remains a long-term play.

AAPL, on the other hand, could break out once and for all in January. Briefing.com expects Apple to report somewhere around the 24th of that month. After throwing $24,000 at the core of the $10,000 portfolio, I've got $8,770 left over to speculate with.

Again, we'll compare the outcomes of three strategies with that money by making three different options plays on AAPL.

Option Contract Investment Entry Price (# Of Contracts)
AAPL Jan 2012 $380 Calls $8,492 $21.23 (4)
AAPL Feb 2012 $380 Calls $8,310 $27.70 (3)
AAPL July 2012 $395 Calls $8,110 $40.55 (2)
Click to enlarge

The AAPL Jan 2012 $380 calls attempt to play a pre-earnings run. The Feb 2012 $380s look to capitalize on killer earnings. Because I leave myself little room for error with such a tight expiration date, it's probably not a trade I would make in real life. The July $395s represent my preferred method to play AAPL. In any event, it will be interesting to see how each trade plays itself out over time. I'll manage each as best as I can and see where the dust settles.

If AAPL does not break out and sustains over $400 in 2012, it might never happen. While I think Apple makes history with earnings, if it disappoints, I give myself some breathing room (and less of a bath) by holding options with a July expiration. With plans for Apple TV coming into focus - and a faster-moving CEO in place - I expect a pre-earnings run past $400, more strength on a solid report, a post-earnings dip of less consequence than previous post-earnings dips and a dash toward $450 on the release of iPad 3, iPhone 5 and more color on Apple TV.

Set all of the inane questions and concerns about its "future" aside. There is not a company in the world that has been able to create a demand for its products like Apple. Until we see something other than feeble attempts to duplicate its success from Apple's competitors, that's unlikely to change. If you look at more than fleeting snapshots in time, AAPL stands as one of the stock market's best buy-and-hold investments.


While I would have preferred to enter each position on a day when the Dow was not up 300 points, I feel alright with the prices received. Sure, we'll probably give much, if not all of it back tomorrow. But the core holdings represent long-term plays. If nothing major changes, I intend to hold these stocks into retirement. I even view the AAPL July options trade as an investment, albeit one with a much tighter time horizon.

For the record, I will use roughly 20% mental stop losses for these positions. Let's hope I don't have to worry much about managing those.

Disclosure: I am long AAPL, AEP, HCP, P, VZ.

Additional disclosure: For tax purposes, I intend to initiate a long position in RCI in an IRA, but not until 2012. I am long NFLX June 2012 $40 put options.