Apple: When The Music Stops

Mar.13.12 | About: Apple Inc. (AAPL)

Let me be perfectly clear. I believe that Apple (AAPL) is the most dynamic company on the planet right now. Everything, and I mean EVERYTHING is going their way.

From products in place to products in the pipeline. We all know what they are and there is little sense in rehashing all of it.

From one earnings blow out last quarter to what I believe will be the next earnings blow out next quarter.

Cash on hand, cash coming in, revenues soaring with no end in sight and the finest technological advancements in all of history within the communications sector, since the invention of the telephone itself.

It has simply been unbelievable and amazing to watch.

I currently have a position in sold puts, the April 495's as well as owning the January 2014 700 LEAPs. I am making significant profits in each and I do not own the stock yet.

It seems likely to me that my naked puts will expire and I will not own the shares at my target price of $495/share and I am re-evaluating my next trade after they do expire. It is likely that i will repeat the process and up my target price probably to the 525 strike price puts. I will let everyone know when I decide to do that.

For now I am continuing to hold my LEAPs which have increased in value by roughly 12% already. It is possible that I will be selling them and taking a profit by the end of this week and will re-evaluate that position next.

The main concern I have is that there seems to be a lot of "irrational exuberance" surrounding Apple. Forgive me for borrowing those two words from a former Fed Chairman, but they do seem to fit in my opinion.

I am NOT looking to see the stock tank, nor am I suggesting that the "end is near". What I am offering up as food for thought is the enormous bullish sentiment in this stock, and the POTENTIAL for risk when the "music stops".

What Risks?

  • The herd mentality that seems to be occurring. Everyone wants to take a bite of the Apple, including me.
  • The constant upward price movement of the shares without any significant correction phase.
  • The RSI fluctuating at levels over 80-90 and nearing 100 on a daily basis.
  • The "Law of Diminishing Returns."

I know that an argument can be made to refute my opinions on basically every point, but when do we begin to realize that we are already playing musical chairs with Apple stock and those buying at ever higher prices will find themselves in a very similar position as those who purchased Microsoft (NASDAQ:MSFT) at those ever increasing prices when the drumbeat of sentiment was almost exactly the same.

Think back to the days when Bill Gates would get up and announce the latest and greatest technological advancement in our history, and the herd would line up to buy the new most unbelievable product ever to be seen. Over and over and over. Until the music stopped.

That does NOT mean that Microsoft became a bad company. The still take in $8-9billion dollars in free cash flow MONTHLY. They also had $90 billion in cash reserves when the drumbeat of what to do with the money was as loud then with Microsoft as it is today with Apple.

I happened to own the stock when they announced a one time special dividend of $3.00/per share, and the share price was 1/10th or less than the share price of Apple today.

It was an amazing moment. At the time, little did I realize that the PPS for Microsoft was beginning to flat-line or already flat-lined, but I did not accept what was before me.

I am not suggesting that Apple's PPS has or will flat-line. What I am suggesting is that at some point, it most certainly will. Nothing lasts forever. Nothing.

We can learn from history, and the history is not ancient this time. Just take a look back at Microsoft. Just think about it and apply some common sense to Apple today.

What Actions To Take Now

I happen to believe that with the new product launches forthcoming, and the new revenue streams globally, that Apple has the potential to be $1,000/share. I am going to ignore the PE because there is nothing to compare it to aside from itself, and there is no quantifying number I can use right now.

It is also my belief that we are on the verge of the law of diminishing returns. I will describe that theory as simply as I can;

When we go to the fast food hamburger joints hungrier than bears out of hibernation, we can scoff down 2, maybe 3 burgers in a row. Quickly, with fries and a soft drink. The taste is the same and we still love it. We want MORE, but we are now fulfilled or close to it. How many more servings can we possibly eat before we become ill?

The very next burger might be the one to just make us sick. Since it is the very same burger as the first one, the law of diminishing returns takes over and no matter how much we love those burgers, we cannot eat one more bite.

That theory can be applied to a company as well. It certainly applied to Microsoft as an example. I believe it will soon apply to Apple.

If you hold shares at a low price I would begin thinking about an exit strategy for all or at least a good portion of shares.

If you are thinking about purchasing shares NOW, I would use the naked put strategy at a price that you are comfortable with, and perhaps buying some LEAPs at a price that you feel makes sense as wee approach top heavy levels.

Either way, you can accomplish your goals with a smaller upfront investment and the opportunity to profit from both sides of the trade.

My Opinion

I am not looking to get slammed here. It is just my opinion, and what I have learned from my own personal experience and history. It is that moment when everyone says it will not happen, that worries me the most.

The music will stop for Apple, I just am not sure when. It is time to be prudent in my opinion.

Be careful out there.

Disclosure: I have a naked put position and a LEAP position in Apple options currently.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.