Apple: Sell Or Hedge?

Includes: AAPL, PSQ, QID
by: Alberto Quintana

We all know Apple (NASDAQ:AAPL). We all know its virtues: strong brand name, top-selling products (even the video Nano iPod is increasing revenue with synergy with other products), no debt, tons of cash (it is are starting to pay a dividend now). So, why are many investors thinking of selling their stocks?

There are several reasons. First of all, to continue with this growth, the company needs to come up with new gadgets and ideas. So far, apparently, it has done nothing but upgrading former products (iPhone 4S, New iPad). Second, the price of the stock is subject to a great volatility due to a huge number of stock options. Third, this sector is very mutable. What seems like state-of-the-art technology one year could be obsolete the next year. More reasons here.

However, the above could all be wrong. Apple could be a once-in-a-lifetime company, and we may want to be part of it. Investors who hold Apple shares are probably very happy lately:

So, why don´t they use some earned buying power to "hedge" or protect their stocks? How? There are several methods, but let us choose a really easy one: we keep Apple and buy a bearish ETF on Nasdaq.

According to our own risk profile and cash availability we may decide to hedge or protect 50% or more of our position in AAPL. To make it clear: imagine that we own $10,000 in Apple stock. We look for a bearish ETF such as PSQ (ProShares Short QQQ ETF, opposite of Nasdaq 100) or even QID (ProShares UltraShort QQQ ETF, the same as the preceding but with leverage, 2x). We may buy $5,000 of PSQ to have some degree of protection (if Apple goes down, probably Nasdaq will go down as well and PSQ or QID will go up), or even $3,000 or $4,000 of QID (it has more "hedging power" due to its leverage).

If we do not have cash enough to buy these ETFs, we could sell part of the position in AAPL to obtain the money to buy PSQ or QID. In the preceding example: we could sell $2,000 of Apple and use the money to buy $2,000 of QID. This maneuver will help us to consolidate our profit while waiting for a clearer future.

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