Options Traders Can Squeeze More Juice Out of Apple

by Michael Shulman | April 18, 2012 8:29 am

[1]The recent sharp downturn in Apple (NASDAQ:AAPL[2]) 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.[3] 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[4]. Learn more about trading weekly options in this free short video[5]. For purposes of disclosure, Michael own shares in Apple.

 

 

Source URL: https://investorplace.com/2012/04/options-traders-can-squeeze-more-juice-out-of-apple/

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