Apple: Taking Some Profits Without Selling Your Shares Just Yet

| About: Apple Inc. (AAPL)

It feels good to be the king. Who could possibly blame someone who bought Apple (NASDAQ:AAPL) ____ (insert any date you wish here) for feeling like they are king or queen of the world. Clearly you are smarter than the person who sold you the shares, there can be no question about it. It's one of the human emotions that really have no equal, the euphoric feeling of money and wealth piling up endless for no more reason than you figured out how to open the golden treasure chest.

As a full time trader who has been around the block a few times I see and hear investors of all types endlessly talk about Apple and why this or why that will either make it move higher or send it down on an iDump in price. For most traders and investors and especially newer (they don't have to be younger) the pattern appears to be in threes. Three unusually large wins or three unusually large losses in a row tend to be enough of a mental shift to put many people off of their plan and or "A" game.

Where do we find a three in Apple? It's not all that easy to find unless you're looking in places most don't look. The chart that says the most about where the price of Apple stock is in relation to the overall universe of possible Apple buyers is the monthly chart. Nice steady classic rock-and-roll rise by a company executing on all eight cylinders. What changed was the flip of the calendar.

2012 has marked the rise of many stocks and we can see it on the news now daily. It has been said, and I agree a rising tide raises all boats, so it should be no surprise to see Apple's luxury yacht shining in the blue waters just outside a calm port. While some people have started (maybe some time ago too) to think in their heads what they can buy if only Apple will make it to $600, what else at $625 and the endless upgrades they will easily pay for with an Apple trading north of $700 a share. If you fall into this trap or are in it now, than likely you are also someone who may not be all too proud of the last 10 results. In fairness, I usually use five year comparisons but considering the last three have been almost a straight run higher and five years ago puts you near even money it's not a good test unless you're a short seller.

If emotion doesn't dictate your buying and selling choices and you believe Apple may be nearing a top, but are not quite sure how to time it in this market you do have another choice in your exit strategy. One of the strategies I employ for my longer term exits (as well as entries) is the use of options. There is good reason to do so as well. Timing the market isn't for anyone, but a full time professional is a fool's game at best. Market professionals have a challenge in timing exits so a casual investor cannot expect on average to exit a position with better results than a flip of a coin. If history is used as a measurement, your odds or less than a fair flip of a coin. Are investors sentenced to a lifelong pursuit of a lucky coin?

With the use of options, investors are able to exit part or all of a position without having to time the sale right down to the minute. For example, with Apple currently trading around $578 a share after the recent move higher in price you would feel comfortable selling in this current price range, but not sure because you're thinking you might be leaving money on the table. One method of exiting a position and squeezing out a little extra income is by selling an in the money call option against some or all of your shares. Remember when entering or exiting, you generally do not have to make an "all or nothing" move. Typically when I enter or exit a position I will scale in and out as I do not try to pick tops and bottoms right on the nose.

In this case for simplicity, let's say you have 100 shares so the only real choice with options is an all or nothing exit (I recommend buying and selling in odd lots provided your broker account is set up to easily trade odd lots without an unreasonable transaction cost to do so). Looking at the March options we see that Apple trades weekly and monthly options. I suggest unless you're really ready to get out sooner rather than later you focus on the monthly options for the usual liquidity advantage of DITM (deep in the money options). If an investor wanted to exit with options one method would be to sell against the shares owned. Often investors will write covered calls at the beginning of a trade, but selling covered calls is an equally valid method of exit with many advantages.

If you sell a deep in the money call option and for illustration purposes I will use the March $570 strike price call option currently selling for about $14.50 while Apple is trading for about $582. The first advantage is it removes much of the timing decision making process. Yes, I have been told that you still have to decide when to sell the call and at what price, but I have found for most people I teach this method to that this is much easier and indeed it is easier for me too. Instead of selling the Apple shares for $582 you hold on with your option hedge until likely the third Friday in March. As long as Apple is trading for $570 or more at the close you can expect to have the shares called away and you pocket an additional $2.50 and remove the timing of the exit problem.

If Apple moves lower, the price would have to fall below $565.50 before using this exit method which would incur a loss relative to a simple exit at $582. By adjusting the strike price and expiration month you can fine tune the degree of risk relative to time and price that makes the most sense in your situation.

Hopefully I have provided some food for thought on various ways to lower the stress of investing. Let me know your thoughts in the comments below.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.