The two companies below are on a tear. Each one has excelled this year and posted large gains since January 1, 2012, and show no signs of stopping anytime soon. Follow along with me as I outline two bullish strategies for investing in, and taking advantage of, the bull runs these companies are in.
Apple (AAPL) $541.99
Apple has seen exceptional gains since the beginning of the year. Entering the year at close to $400, and closing on Thursday at $541.99, Apple has appreciated over 30% in two short months. With such a high share price, in order to trade in options one would need to purchase at least 100 shares. With Apple, this will cost you $54,199.00. Because of this, and to make my strategy more appropriate for a larger audience, I will focus on simply trading options without purchasing the underlying shares.
For our strategy, we should be comfortable with the notion that Apple will appreciate in value at least 10% by June 16, 2012. Thus, we make our assumption that Apple will be at nearly $600 by this date.
Our aim will be to maximize our return, but also to protect against our downside some, in case of a short term pullback. Because of this, we will be purchasing call options at a strike price roughly 5% below today's price. Given our $5,000 limit, I would suggest the June $515 APPL calls, at $49.20 each, for a total cost of $4920 plus fees.
For this strategy:
- Purchase one June $515 AAPL call for $4920
If we meet our price target of $600 by expiration, we will receive $8500 for our options. Maximum gain is unlimited. If Apple goes beyond $600, gains increase by $100 for every $1 of appreciation.
The downside is that we may fall to $0 value. If Apple were to fall below $515 and we were to hold our options until expiration, they will expire worthless. Strategies like this require daily monitoring of the share price, and taking of profits at appropriate times. Consider if the share price appreciates to $555, or just over 2%, a $515 June call contract will appreciate to over $5500 in value, or over a 10% increase. You may be comfortable with taking profits in a few short days, if the underlying share price moves a small amount and produces a 10% gain for you.
For the next pick, I'll outline another bullish strategy using put contracts.
SiriusXM (SIRI) $2.30
SiriusXM has seen similar appreciation to Apple this year. Entering the year in the low $1.80's, SiriusXM's share price has appreciated roughly 27% in two months. Currently trading near $2.35 resistance at $2.30, if one expects roughly 10% appreciation by June 2012, then you expect the price to reach just slightly over $2.50 at that time.
This puts us in a perfect position for a different strategy of a cash secured put.
For this strategy, we do the following :
- Hold our $5000 in cash
- Sell 20 June $2.50 put contracts for $660
For this strategy, we are required to purchase up to 2000 shares of SiriusXM at $2.50 up to the expiration of the contract. We hold our $5000 cash to "cover" this position. If the price of SiriusXM is over $2.50 at expiration, the puts expire worthless and we keep the $660 as well as our initial $5000, for a gain of roughly 13%.
Downside is that we may fall to $660 value, if SiriusXM's share price goes to $0. With our bullish sentiment, we find this unlikely. Our break-even point is a share price of roughly $2.17 at expiration.
These are two different strategies which do not require purchase of the underlying stock to initiate them, and should only be applied when one is bullish on the underlying stock itself. Consider your risks when trading options, and make sure you understand your potential gains and losses and how time affects the value of your position. For further explanations and visual aids on some of the available strategies out there, please consult this site.