Bullish Play On Apple Into 2013

| About: Apple Inc. (AAPL)

Since 2009, Apple's (NASDAQ:AAPL) stock has consistently made new highs. Remarkably, even if you bought it at its very peak during each year, you made substantial gains 52 weeks later. From 2009's high to 2010's high, you gained 53% in share value. From 2010 to 2011, you gained 31% in value. From 2011 to 2012, you gained 51% in value. What will be the increase in value for 2012-2013? While no one really knows how much higher Apple can go, a safe argument can be made as to where Apple won't be - lower.

Listed below are the yearly highs for Apple stock since 2009.

Apple Stock Yearly Highs:

  • 2009 HIGH: 213.95
  • 2010 HIGH: 326.66
  • 2011 HIGH: 426.70
  • 2012 HIGH: 644.00

The median increase for yearly highs the past three years is 45%. Should that trend continue into 2013, Apple would have a price target of $934. While that may sound high, don't forget where Apple has come from since the lows of 2009 and that many analysts have raised their price targets to $1,000 a share and up. While no one can foresee how high Apple's peak will be next year, it is safe to say that Apple won't be trading at a lower price next year for the following reasons. First, Apple has now instituted a nice dividend ($2.65 a share) to be paid beginning July 2012. Thus, a new class of buyers, namely funds that only target dividend paying stocks, will start gobbling up Apple shares (Apple will also be starting a $10 billion buy back program in October 2012). Second, Apple continues to innovate with the hottest new products. In addition to the much anticipated iPhone 5 to debut later this year, analysts have already pegged Apple iTV to be a serious catalyst in the early part of 2013. Third, Apple's growth story is astonishing and will continue to amaze as they obtain market share in emerging markets like China (whose largest wireless provider has yet to sign on with Apple). Finally, let's not forget that Apple trades at a substantial discount (14.34x Price to Earnings multiple) to the S&P 500 (21.52 x earnings). In other words, if Apple was trading at the same multiple as the broader market, it would be worth $880 a share right now!

How does one best maximize the potential for Apple to make new highs next year? Options. And not options with expirations soon approaching. Leaps are the only options you should consider and this is the reason why. One thing most Apple investors should know by now is that while the smart money has been optimistic about share appreciation the past few years, you just didn't know when exactly the shares would reach its highest point. Yes, the past three years have shown a trend as to when the highs are likely to occur. In 2009 and 2010, the high of the year occurred in December. In 2011, the high of 426.70 printed in October. Thus, the highs of the past three years occurred at some point in the fourth quarter. If the trend should continue, the January 2013 options would be ideal BUT what if that trend doesn't continue? The optimal way to capture the next high in Apple via options is to be in the game for the entire 2013 year. Thus, the best plan is to purchase January 2014 calls. Here are the ones that caught my eye:

At the time Apple was Trading at 586.00

  • Apple Jan '14 500 Call: 147.30; Delta: .72; Gamma: 0.00; Theta: -.07; Vega: 2.58
  • *****Break even would be 647.30 by January 17,2014
  • Apple Jan '14 550 Call: 122.40; Delta: .65; Gamma: .00; Theta: -.08; Vega = 2.86
  • ****Break even would be 672.40 by January 17, 2014
  • Apple Jan '14 600 Call:100.25; Delta: .57; Gamma: 0.00; Theta: -.08; Vega: 3.01
  • ****Break even @ 700.25 by January 17, 2014

Taking a more conservative approach relative to historical price action, I have a $750 price target for 2013. That represents a mere 16% of 2012's high, assuming the high reached in April was the peak. Furthering the conservative outlook, let us imagine that the $750 target will not be achieved until January 17, 2014 (thus, no time premium will be added). Below is an outlook on the ROI for each option.

  • Apple Jan 500 Call: Value - $250.00; 70% Return on Investment
  • Apple Jan 550 Call: Value - $200.00; 63% Return on Investment
  • Apple Jan 600 Call: Value - $150.00; 50% Return on Investment

As you can see, the optimal return is the $500 call, but this would obviously change if the stock price were to appreciate more and at an earlier date. I also believe that Apple will continue to correct (at least to fill its earnings gap) during the summer and so this leap should not be implemented until then when the options will be priced cheaper.

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