Options Trades In Apple, Microsoft And Citigroup

Includes: AAPL, C, FB, MGM, MSFT
by: XRTrader

In my recent articles, I mapped out several option trades. Many were successful, while one (NYSE:MGM) is still in a holding pattern. I shorted AMZN, which turned out well - although if I had held longer, it would have turned out even better. I went long BTU and recently closed half my position at $28.90 in the very rapid recent run-up. I hope to add to my BTU stake again if it drops, but the gains were so rapid I felt that I had to lock in some profits. I went long CLF, which also appreciated very quickly causing me to take some earlier than expected profits. And, today (10/24/2012) I sold a portion of my Facebook (NASDAQ:FB) investment at $23.60 that was initiated between $18 and $19; I am still long FB and will look to add on a drop near $20 again with the lock-ups. I maintain the option and stock position in MGM, which I will hold through January 2013.

Because of these successful (and now liquidated) positions, I find myself with too much cash. Below are the trades I have on my watch list for possible execution in the next week or two.

Stock prices are as of close of market on 10/24/2012, and option prices are at the mid-point of the bid-ask spread from the same date.

Microsoft (NASDAQ:MSFT) - At $230 billion by market capitalization, and with about $70 billion in cash equivalents, MSFT is trading for net $160 billion ex-cash. At this price you get about $80 billion in annual revenue and $3/share in EPS. MSFT is cheap and stable. And, it comes with a 3.3% dividend. None of these numbers adequately take into account potential success of its new hardware (the Surface Tablet - and presumably future generations), the increasing value of Skype, or better-than-expected success with Windows 8.

  • MSFT : $27.90.
  • MSFT November $28 Puts at 0.75 Sell to open

  • This gives you 2.3% discount to current market price if you're put MSFT at 27.25, which may not sound like much, but it's still a discount. And, we want to own the stock anyway.

  • My brokerage shows a 30% margin/cash hold, so if the puts expire worthless we get about 7% return on the cash we are locking up. In a month!

  • The benefit for us here is that MSFT is a stable stock, and so the cash/margin hold is low.

  • If we were put the stock, we could go ahead and sell a longer dated covered call (3%+ yield or so, depending on which we picked) and collect the interval dividend.

  • All in all, a safe strategy with potential for good return.

Apple (NASDAQ:AAPL) - Plenty of articles on Seeking Alpha review AAPL's recent product outlook, its earnings/revenue stream, and its future growth; there is simply no need for me to repeat any of that here. I will simply state that I think AAPL is undervalued at this price ($616.83), after the recent significant price drop. And, from a trading perspective I think it will bounce before or during the holiday season as people start whispering about the sales. As a note, AAPL earnings are expected 10/25/2012, and this possible trade should be watched after earnings to see how the price movement and IV change affect the risk/reward of the trade. The best scenario would be a stable AAPL price with an IV crush causing our options to cheapen.

  • AAPL : $616.83

  • AAPL January 2013 $620 Calls at 38.30 Buy to open

  • AAPL January 2013 $700 Calls at 10.80 Sell to open

  • Trade : Establish a January 2013 Call spread for net 27.50.

  • Maximum value at expiration is $80 if AAPL is above $700 (291% possible gain).

  • Break-even is with AAPL at or above $647.50 at January 2013 options expiration.

Citigroup (NYSE:C): Citigroup stock has been on a tear recently. Its earnings are recovering and it has a strong presence in still-growing international markets. This is not a trade I would execute with any more than a small portion (2-4% of my account). It is a trade that aggressively sets up for further price appreciation in C with very little cash outlay. This trade is perfect for those who have cash on the sideline but want to assume little direct price risk.

  • C : $37.30.

  • C January 2014 $40 Call at $4.70 Buy to open.

  • C January 2014 $50 Call at $1.77 Sell to open.

  • This establishes a $40-50 call spread for net $2.93

  • C January 2014 $30 Put at 2.86 Sell to open.

  • Net debit to your account is $0.07 (7 cents!) per contract.

  • For this you agree to buy C at an effective price of $30.07 in January 2014. That includes the price C would be put to us at ($30) and the net cash outlay of $0.07. That's down 19% from the current market price! Better than buying it now, eh?

  • At $0.07 net price, the trade has basically 0 cash outlay, and a maximum value of $10 (at C greater than $50 as of January 2014), which is a ridiculous 14,000% on cash spent. Even including the cash/margin holding requirement, the trade produces very nice returns at C above $40 (exact percentage depending on your broker and how much cash they require to secure the puts).

At time of writing, I have partially executed the MSFT trade (sold half of the contracts I intend to sell), and have orders out for C. I will wait to see what AAPL's option price action is after earnings before putting in orders for that trade.

Disclosure: I am long BTU, MSFT, MGM, FB. 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.

Additional disclosure: I may initiate a long stock or option position in AAPL and C in the next 72 hours.