5 Summer Trades To Seriously Consider

 |  Includes: AAPL, GLD, MCD, PCLN, TLB
by: Bill Maurer

While officially the summer will not be here for another few weeks, the unofficial start after Memorial Day is here. The summer months usually see a little less trading volumes, with many away for vacations and taking time off. That can sometimes increase volatility in the markets. Either way, you can still make money. Here are five interesting summer trades to consider this year.

1. The iPad/iPhone trade:

This is going to be a tremendous quarter for Apple's (NASDAQ:AAPL) iPad. With the new version getting a full selling quarter, most estimates range from 14 to 18 million units sold for fiscal Q3. But realistically, it all will come down to the number of iPhones sold, as iPhone revenues will probably be about half of the quarter's total. Either way, these two products make up a majority of Apple's revenues, and that fact is not likely to change anytime soon.

Now, I've already posted my initial projections for the quarter, and I've told investors to expect a good quarter, but to not be too overly optimistic. Analyst estimates have gotten high already, so expecting another 30% earnings beat probably is unrealistic at this point. As many analysts are telling us, iPhone sales are being held back as consumers wait for the new phone later this year. I agree with that statement to a point, but I'm not as bearish as some analysts.

Apple closed Wednesday at $571.46, which is still about $75 away from its all time high. The average price target is over $700 currently, and many would argue that there is still room to grow. I agree.

So there are three different trades I could recommend. First, you can just get long the stock. I would recommend this trade for those that aren't willing (or unable) to engage in options trading, or those that maybe can only afford say $10,000 in the name (where an options trade might require you to be able to cover 100 share blocks, which cost about $57,000 currently).

But there are two options trades I could recommend for those willing to take a little more risk. The first is buying deep in the money calls, specifically the $400 October expiration call. This trade costs you $176.30 per contract, or $17,630 per 100 shares. This allows you to get effectively long 100 shares of Apple (per contract), for roughly 1/3 of the cost. You only pay about a $5 premium, and the option will move roughly as the stock moves. You won't have to cough up nearly $60,000 for 100 shares.

The second trade is to sell an out of the money put, for instance, the $500 October put for about $20. The trade works like this. If Apple stays above $500 through expiration, you pocket $20, or $2,000 per contract. If Apple closes below $500 at expiration and the shares are called away, you are forced to buy 100 shares (per contract) at $500, but you get to keep the $20 premium, so you'd actually pay about $480 for your shares. That seems like a deal with the stock at $570.

2. A Merger Arbitrage Play:

For those that are unfamiliar with what this strategy is, I'll make it as simple as I can. A stock is going to be bought out for $20. It currently is trading at $19. You buy the stock at $19, with the expectation that it will rise to $20 by the time the deal is complete, or that you can tender your shares to the acquirer for $20, realizing a $1 profit. You may ask why shares don't trade to $20 when the deal is initially announced. Well, there is always the chance that the deal falls through, and the stock will probably fall in that case. There is a bit of risk involved, which is why shares are trading at that $1 discount.

An interesting one to play right now is The Talbots (NYSE:TLB), a women's clothing chain. A recent buyout offer from Sycamore Partners is for $2.75 a share, and the stock is currently trading at $2.40. There is a nice gain to be had there, should the deal go through. Now, the stock is trading at a discount as some believe it may not go through. Sycamore had made a higher offer previously, but deal talks fell through, sending shares down to about $1.30. The new deal was announced and shares nearly doubled the next day. I've been monitoring this name since the new deal was announced, and think this might be a good play. But don't just take my word for it. For a more detailed analysis of the situation, I will defer to one of my Seeking Alpha colleagues, Adam Gefvert, who does an excellent job of breaking down this potential merger arbitrage play.

3. The Money Printing / Quantitative Easing Play:

There are definitely problems in Europe, and some of the latest economic news in the United States hasn't been very good either. It appears that more stimulus is going to come, and that governments may start printing more money.

The logical trade at this point is to buy gold. Now, most investors probably can't, or aren't willing to, trade gold futures. But we have a solution for that! The SPDR Gold Shares ETF (NYSEARCA:GLD) seeks to replicate the price of gold as closely as possible. Gold is currently around $1,625 (and the GLD is at $157.21), but most think gold is going to $1,800 or even $2,000 later this year. You could either buy the ETF outright, or if you want, use the deep in the money call option I provided above with Apple. For instance, buy a December $110 call for about $48.50.

4. The Summer Travel Trade:

People are going to take vacations. That's what the summer is for. With economic conditions not in the greatest shape, people are going to look for the cheapest ways to travel, stay at hotels, etc. What's a better way to travel cheaply than to use Priceline (NASDAQ:PCLN) and name your own price?

Priceline shares dropped after their quarterly earnings, which weren't that bad. Priceline missed on the top line, barely, but beat on the bottom line. Guidance was a little light but Priceline usually gives very conservative guidance. Shares have rallied the past few days off their recent lows near $600. They are now at $642.51. I really like the name, but you might want to wait for the next leg down to see if you can get it a little cheaper. Perhaps back in that $600 to $625 range.

5. The Everyone Needs to Eat Trade:

Yes, everyone does need to eat, and over the summer, fast food joints are a pretty good option. Quick food at reasonable prices, and when people are on vacation, they are a good place to stop. Also, think about it logically. I'm more likely to go out to a fast food place when it is 80 and sunny than when there are 2 feet of snow outside. I really love french fries, but in the winter, I'm not going to battle icy roads just to have them.

I really like McDonald's (NYSE:MCD) in this space because they are just the biggest one in the space. They are going to get plenty of customers. You might think that the company can't possibly grow, but you would be wrong. Revenue growth this year and next is expected to be in the low to mid single digits, with earnings growth a little higher. McDonald's shares have pulled back to the upper $80s from over $100 earlier this year, and that presents a buying opportunity.

Summary of Trades:

These are five trades that I've found that could be good ones to enter at present. I'm currently evaluating my portfolio and might enter one or two of them myself. Now I will remind you that some of these trades are risky, especially the ones involving options. Before entering any of them, you should always know what each trade involves, including any possible margin requirements and profit/loss scenarios.

Now, US markets have rallied a couple of percent off their recent lows on the hope for more stimulus and the promise that Europe may get its act together. If you believe markets are headed lower still, you should definitely wait before executing a few of these trades (gold one could work even if markets decline). For instance, you might want to wait for Apple to reach $550 or Priceline to reach $600. That will adjust some of the options strategies slightly, but you can adjust your option strikes accordingly.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL, TLB over the next 72 hours.