Apple: Profiting From The Pullbacks

 |  About: Apple Inc. (AAPL)
by: Mike Stallings

I wrote an article back in early March describing how I thought Apple (NASDAQ:AAPL) would pull back to $500 before it saw the $600 mark. Although the stock did have a dip of about 10% (on which I profited on), the stock only fell to as low as $515. I ate my crow and pointed this out to all of you in this article, however it did not satisfy the mob. I was subsequently burned at the stake...

So where does that leave us (besides me being well done?). Apple again proceeded to push itself past the $600 mark as high as $644. But as it has done time and time again, a pullback has occurred.

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As you may recognize above, there is the chart I used on my original article a few weeks back. Historically, Apple (like many other stocks) has grown in spurts and then given some back, in most cases double digit at a time. Though I was wrong on the dollar amount when I wrote the initial article, I was still correct on that there would be a short term pullback. Now let's look a more recent chart:

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As you can see, the stock was in $540 range around March 5th, and climbed to as high as $644 as we mentioned (19% short term spike). This recent jump was on top another longer run that has seen this stock gain nearly 50% in this calendar year alone! Even today amidst the bad news on the legal front, the stock is tumbling another 3% as we speak (and I finish this article).

So what does all this mean? As I have mentioned in previous articles, this stock is not immune to pullbacks and losses. It is a juggernaut agreed and I believe long term in a home run. But is does not mean you cannot profit from it behaving like a normal stock does. For example:

Let's say you bought in at the $450 level and purchased 200 shares. You would be VERY happy at this point having recognized a 30% ROI if you sold today. Probably not enough to send you off to your own island, but a nice chunk of change to get you on your way. You believe in the long term growth of this stock but like many of us like to make money as well. How can you have both?

If you took your 200 shares and sold 2 May $650 covered calls against them, you would net a total of around $2,000 (less fees/commissions). The stock would need to rise another 11% (and more importantly HOLD at that level or higher) by May 18th. That is less than 30 days away. Options OTM (out of the money) less than 3 months away expire worthless 75% of the time. You are getting about a 1.5% ROI (AFTER FEES) over less than a 30 day period which works out to over 18% over the course of a year. AND you are not risking anything unless the stock goes on a large run AND holds a price over $650 on May 18th. If it does, in the above scenario you pocket the $2,000, your shares are called at $650 which means on the initial transaction you profit only a measly $42,000 on a $90,000 initial investment (46% ROI not too bad).

Although I was roasted last month since I predicted $500 again before $600 (and ate my crow like a man) I still believe this stock is subject to pullbacks like any other and a smart investor can profit from the swings.

Disclosure: I am long SIRI.