Apple: Too Far Too Fast?

Mar. 2.12 | About: Apple Inc. (AAPL)

Since I sold my LEAPS and wrote an article about it (here it is), Apple (NASDAQ:AAPL) has gone straight up and I missed out on another $30.00 move upward. I did however make a nice profit, which has been sitting in my cash reserve account safely tucked away for the Apple pullback that simply does not want to happen.

I suppose everyone knows my position on Apple at this point. It is a once in a lifetime type of company that has everything: amazing products, more in the pipeline, a launch of iPad 3 in a few days, as well as a tag along rumored iPad 2 "low price" launch.

This also does not take into account the Apple TV, which I believe will happen later this year, and the upside to revenues and earnings has not been priced in as of yet either.

My belief is that AAPL will be a $700 per share stock within 12 months.

Is everyone clear on that?

Some PPS History

I do not need to show the amazing chart of Apple shares' rocket ride to convince anyone that it has been nothing short of remarkable, just as the company itself has been.

  • November 25th, 2011: $363/share
  • December 15th, 2011: $379/share
  • January 3rd, 2012: $412/share
  • January 24th, 2012: $420/share
  • February 15th, 2012: $498/share
  • March 2nd, 2012: $545/share

Not only has Apple PPS not looked back since 11/25/2011, it has hardly even glanced back.

During the same time frame the PE ratio has gone from about 10 to nearly 16. Not long ago it had a similar PE ratio to that of Dell, Inc. (NASDAQ:DELL) which was ludicrous, yet as of today it has the highest PE ratio in its sector.

Many would argue that Apple has created its own sector and PE ratios are irrelevant. I get that position, but the fact of the matter is that as a technology company, it is only as good as its next product. Thus far, Apple has been incredibly successful with every product launch, and it appears that the trend will continue until who knows when.

With all of that being acknowledged, the price of the stock has simply risen too far, too fast, and its parabolic move sets itself up for a sharp move downward, even for a short period of time, in my opinion.

Think about this: Investors who own shares at $100, $200, $300, $400, and even $500 bucks a share and have not sold any, are thinking that they are brilliant. Okay, I concede. You are all brilliant. Many people bought the shares today at $545/share and are HOPING they are brilliant. I hope so as well. My bottom line is that as the price goes higher faster, the risk gets greater, especially without taking a breather. To me, I think a short position in the form of put options could be the correct play right now (or just after March 7th iPad 3 launch).

My Upcoming Trade

I am going to buy the April 20th 525 strike price put options on Monday at about $1500 per contract.

I will set a limit price of $1550 per contract and a stop loss at $1000 (if not a stop loss, then that is what I am going to sell the put at if I make the wrong bet here). I will allow myself a 50% loss if I am wrong.

I can mitigate that risk by buying calls. If I were to do that I would use a strangle strategy by buying the April 20th 575 strike price call options at a price of about $1250 per contract.

By using the strangle strategy i could make money on the calls if the share price continues to rocket, or if the stock drops as it did for one day a few weeks ago, on the puts. Basically i am hedging my bet and limiting both the upside and the downside.

I am not going to do that, however. I am taking the much riskier road with a portion of the money I have already pocketed from the sale of my LEAPs and placing a bet that I am correct in my opinion that Apple shares have risen too far too fast and will drop.

I believe the drop will be sharp and fast, and I think about 10%, and I could potentially see a 50% profit (or more) by the end of next week if my bet is correct.

My Opinion

I am not suggesting that anyone make this trade. I am letting my readers know that this is what I am going to do. It is a very high risk trade that I am making an educated guess on.

There are a bunch of option experts on Seeking Alpha that know more in one fingernail than I do in my entire brain (even if it is a tiny one) about these risky trades and how to navigate them, but I do like to take a gamble every now and then.

For this trade I am disregarding the fundamentals of Apple completely, and using an experience based judgment call on how I have personally seen many, many stocks react in my investing and trading lifetime.

IF anyone decides to make this "gamble" -- and trust me, it IS a gamble -- then remember you can lose a part or all of the money you place at risk. The one good thing about this gamble is that you will only lose what you are willing to spend.

If you cannot afford to lose any money, do not take this risk.

Disclaimer: This is NOT a recommendation of any kind to make this trade. As a matter of fact, I advise against it if your risk tolerance is not at an ultra high level.

Disclosure: I am hoping to buy PUT options on Monday within my price range to implement this trade.