Apple: How Can We Profit Now?

| About: Apple Inc. (AAPL)

It's hard to believe that the myriad of articles written about Apple (NASDAQ:AAPL) have been almost completely fear riddled. In the past, I have written articles (check this out) that have suggested that investors take profits, but I have never said that Apple is dead and the stock should be sold.

Taking profits and re-allocating funds is a normal and prudent approach, especially when significant gains have been made. That does not mean for an "iNano" second that Apple is no longer a growth stock.

Quite the opposite, Apple is THE growth stock. The one stock that can actually affect the market indexes as well as the GDP. The question is how investors can profit with Apple stock now, in a rather tumultuous period for the shares and the company.

What Has Been Going On?

First let's look at the recent chart:

This one-month chart shows a retracement of roughly 10% in a short period. We have seen dips in Apple of this size in less than a week, so how unusual is this? Not very.

The point is, that we might be approaching a price point that will be more affordable for new money to flow in to the stock. Keep in mind the short-term events that could send Apple shares higher.

  • The launch of the iPad Mini.
  • The continued success of the iPhone 5 and iPad, globally.
  • The holiday season that could rocket every product to even higher sales figures.

Obviously, what we have been hearing about from the bear side is that the iPad might not be ready, nor will it sell as well as expected, plus it could dilute the sales of the already popular iPad.

The supply issues that the iPhone is facing could hamper sales now and into the holiday. The supply issue can affect revenues and the bottom line sooner than later. Plus, the competition is nipping away at smartphone and tablet sales.

This holiday season could be tepid and underwhelming, given the rather sad state of the economic recovery. This could also hamper sales and profits for the near term.

In and of themselves, all valid arguments. Valid to the point where the stock has taken a 10% "haircut" and might even have another 5-10% waiting in the wings.

That to me, spells opportunity.

Profit Now Without Owning One Share

I have been an Apple wannabe for quite some time now. I just felt that at over $500.00/share, I could not afford that many shares to make a significant "dent." That is wrong thinking of course, but I have still managed to make money on Apple using options.

I have owned in the money LEAP calls and made money. I have sold out of the money naked puts and made money. I have combined the 2 strategies to pay for the LEAPs with the premiums received from selling the naked puts, and made money both ways.

At this moment in time, Apple "wannabes" can make money by selling naked puts. Pocket the premium immediately, and if the stock happens to fall precipitously, we can finally own actual shares at a price that might otherwise seem ridiculously low.

Take a look at the following put option, found on Yahoo! Finance:

500.00 AAPL140118P00500000 44.30 Up 1.60 44.45 45.75 1,651 4,231

This put option is the January 2014 Put LEAP. The premium as of today's close was about $4500/contract. The question an investor should ask themselves is if they would buy Apple shares today at $500/share? How about a year from now? Of course we would. If the price of Apple drops tomorrow for some unknown, silly reason, and you had an order to buy shares at $500.00 you would be jumping up and down with sheer joy!

After all, everyone believes that Apple will continue to perform, and will continue to change the world we live in and the share price is undervalued at even 700 bucks a share. I happen to be in that camp also, but I simply do not want to lay out 64,000 bucks for 100 shares right now. I do, however, want to make money on Apple shares and own it at a price I feel really great about.

So, here's the deal; I sell the January 2014 500 strike price puts, for around $4,500/contract. I take that money and either invest it, or put it into cash reserves, or maybe just spend it on holiday gifts.

In about one year, if Apple shares happen to be at the ridiculous price of $500.00/share, and I have the order filled, I will be the proud owner of Apple at $455.00/share ($500 less the premium received of $45/share). Not only will I be happy, I probably will be celebrating my relative genius.

So What Are The Risks?

Nothing is without risk, however this option strategy is perhaps one of the more conservative trades one can make, and has been used with the "core" stocks of many portfolios for a very long time.

The beauty of this trade is the size of the premium. We can "make" $45.00/share with just the push of a button here. The risks are as follows:

  • Selling a naked put will "freeze" either cash or margin for the amount needed to fill the actual purchase of the shares. Be prepared to have no access to that amount for as long as you hold the put position.
  • If Apple's business goes haywire and fails miserably, you could wind up owning shares of a stock that you do not want, or if the share price drops to $300 by the expiration of the put options, you are on the hook for owning the shares at the put price ($500/share).
  • The share price could rise and you will still not own Apple shares and miss out on the further capital appreciation.

These are real risks and should be reviewed carefully to see if your risk tolerance can handle them. As for me, I tend to rationalize in the following ways:

  • OK, so money is "frozen." If I could find a 15 month CD paying me $4,500 to "park" some cash ($50k), would I do it? I would, would you?
  • If Apple's business went "bad," I would buy back the option and probably take a loss on the option, just as I have done when I have dumped lousy stocks. With an option I would wait until the premium was virtually wiped out by time erosion, and take that action, rather than owning shares of a bum stock at an overpriced amount. This to me, is the biggest risk, but is it a reasonable risk with Apple stock? That is a question every investor needs to decide themselves.
  • Finally, as I watch the stock of Apple rise in price, the price of the put option will decrease. This means I can actually buy back the option and make a profit, and do the process again, but perhaps at a higher strike price. This to me is not much of a risk, and can be very profitable if the trade is monitored and an investor can react. This might even become a cash cow if the trend continues.

The Bottom Line

Making money with Apple does not mean that we have to jump on the shares when the price falls. We do have other options, with options, to make money while we decide to own shares at the price we feel comfortable with.

Not only is Apple a great investment, it is also a great money making equity in various ways. Check your risk profile and see if this trade is right for you to consider.

Disclosure: I am considering selling naked put options to take a LONG position in Apple. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.