The recent sharp downturn in Apple (NASDAQ:AAPL) stock is a tremendous opportunity not only to own the world’s best and most undervalued company — yes, undervalued, more on that in a minute — but to create a block of capital that generates income every week, every month, every quarter (or every year). And I am not talking about their new and still-paltry dividend.
In recent days, Wall Street analysts and other financial experts have said the stock has run too much. Technically that is true – the downturn is now almost 10%. And the stock could sell off a bit more and sit still for a while.
So what?
Here are a couple of facts about Apple.
- Number-two brand in the world based on brand value.
- Market leader — in terms of product quality, product features and product perception — for laptops, mobile phones and tablets.
- Small market share across the board. Apple holds less than 5% in computers, less than 3% in cell phones, and if you add low-end laptops and netbooks to tablets, less than 25% of that market. Translation: there is enormous room to run, a once-in-a-century set of market metrics for an industry leader (not to mention one of the world’s largest companies as measured by market cap).
- Annual growth is conservatively estimated to be above 25%.
What about the stock? More facts.
- It is selling at a discount to the S&P 500. The pundits who like seeing themselves on CNBC keep saying it is near the average value of an S&P stock. They do not factor in growth, and that makes AAPL undervalued to other S&P growth stocks by more than 50%.
- If Apple was valued on the scale of the Facebook IPO, the stock would trade for $1,200.
What to do?
- If you own Apple at a reasonable cost basis, I would sell calls. If the stock stays flat and you sell weekly calls, you can generate a 90% return depending on the strike prices you choose. I did not miss a decimal point – the options have wonderful premiums. If you sell monthlies, this comes down into the 20%-35% range.
- The call trade: If you own (at least 100 shares of) AAPL, sell the call two strikes up from where you bought it. If you bought it at $582, for example you sell the April $590 call. Since this is the third week of the month, all monthlies are, in effect, weekly options. This contract is currently bid at $21.55, or $2,155 per contract. If you are called out, your net gain is $2,955 per contract, a return of 5.0% in a week, 264% on an annualized basis. Nope, did not miss the decimal point.
- If you want to sell a put, there are two positions: one for a person unwilling to own Apple, and the other for traders willing to own the stock if put to them. If you are willing to own the stock, sell the April $600 puts. You will get around $390 a contract. If they expire worthless (AAPL stays above $600 through Friday), your return on capital will be shy of one percent, 34% on an annualized basis.
- If you really are not willing to own the stock – and when you sell a put there is always a chance you will be put the stock (please keep that in mind when putting together a put position) sell the April $580 puts, for which you will get around 85 cents. That produces a return of just over 7% on an annualized basis.
Am I an Apple bull? You bet — my target price is $1,200 in the next 1-3 years. And as my frequent readers know, I love generating weekly income from selling calls and puts.
One last note – do nothing on Monday or Tuesday of next week, as Apple reports earnings after Tuesday’s close. I have no idea how Wall Street is going to react to what are likely going to be blowout earnings.
Michael Shulman is editor of Options Income Blue Print. Learn more about trading weekly options in this free short video. For purposes of disclosure, Michael own shares in Apple.
