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Vineet Dutta
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Vineet Dutta currently holds a Masters in economics and is currently works as a consultant in the risk management space. Before working as a consultant he has worked at one of the large money center banks, where he worked within the institutional counterparty risk organizations. Vineet’s has... More
  • Another Way To Play Apple  2 comments
    May 8, 2012 5:00 PM | about stocks: AAPL

    I am probably one of the few that currently does not hold any shares in Apple (NASDAQ:AAPL) but do not feel sorry for me. I have been in and out of the name couple of times through options recently.

    Yes, we all know AAPL does not trade down often espicallywith the rest of the market but it doesn't rally either when the market turns downwards. This why purchasing call options becomes tricky, even if AAPL does not trade down with the market you would still lose on the trade if AAPL trades sideways. This is because of the time decay factor options have built into them. So I realized probably one of the best ways to trade AAPL is to sell puts options.

    Investment Thesis

    AAPL tends to follow very similar trends through the months. It tends to rally into earnings, beats earnings expectations, gain a few percentage points on its earnings release and then consolidate at a particular level and the cycle repeats again. For the most part, this is a common trend I noticed with AAPL over the years. With 2012 shaping up to be very similar to 2010 with next generation product launches in addition to a possible new product releases. This trend will be amplified and the stock price will continue to move higher at a more rapid rate. Another factor that will act as a catalyst for AAPL's iPhone sales will be the expansion of distribution channels with new carriers coming on board.

    Trade Outline:

    How the trade works and why it works is pretty simple to understand. To enter the trade you would have to underwrite the put option. By doing so your view is a positive one and you expect and hope that the stock does not trade at or below the strike price of your put option (in this case $400). If the stock closes below or at the strike you would be put the stock and would have to purchase the stock at that particular strike. You hope to collect the premium from underwriting the put option. Below you find an example of a trade and the different outcomes that can come of it.

    You sell a put option with a $450 strike with an expiration of October 19th 2012. The current value of the option is trading at $12.60 and is worth $1260. Come October and AAPL is trading above $450 you would have just collected $1260. In the event AAPL is trading at $450 or less you will be put the option and would have to purchase a 100 shares at $450 but your actual cost base would be $437.4/share because you sold the put option for $12.60.

    I find this strategy of selling put options to be more lucrative then owning the underlying shares of AAPL and in a sense create yourself a "secret dividend" from trading AAPL. I currently apply this option strategy to my portfolio and have positions in being short AAPL puts.

    *Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss.

    Disclosure: I am long AAPL.

    Stocks: AAPL
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Comments (2)
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  • whitehead1
    , contributor
    Comments (421) | Send Message
     
    what if AAPL trading at $300 or worst even $200 at the expiration of option? How much is your downside.
    I see now AAPL has become a value stock. When growth stock becomes value stock then I lose my faith in that stock. I am not betting that AAPL will go to 200 or 300 but it looks like a value trap waiting to happen in next year. I liked it when it was trading at 30 to 40 multiple and now I hate it since it trades at 10 multiple.
    Even in 2009 it dropped from over 200 to 70. Anything can happen.
    8 May 2012, 11:00 PM Reply Like
  • Vineet Dutta
    , contributor
    Comments (3) | Send Message
     
    Author’s reply » Your downside would be capped i.e if AAPL goes to 0 and the most you would lose is $43,740 that is the most you would lose if AAPL goes to 0. I think AAPL has given investors best of both worlds value and growth. Yes AAPL might slow in the coming quarters and reason for that might be people are waiting for their new product launch and this will cause consumers to put off purchase till then. Also a slowing global economy will affect AAPL.
    9 May 2012, 09:35 AM Reply Like
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