3 Options Trades for High-Priced Stocks

by Lawrence Meyers | December 5, 2012 6:15 am

Anytime I look at the stock price for Google (NASDAQ:GOOG[1]), Apple (NASDAQ:AAPL[2]) or Amazon (NASDAQ:AMZN[3]), I have two primary reactions.

The first is to slam my head repeatedly against my desk, because I held all three stocks at one point at much lower prices, sold when I’d made a 20% gain and felt so very smart, only to see each soar to what seems like a gazillion percent return.

The second reaction is that I want to buy each of them, but the idea of shelling out several hundred dollars per share for each makes my stomach hurt as bad as ingesting artichoke leaves in their entirety.

So these days, as I contemplate my moves for next year, I’m thinking about working with options on these behemoths instead.

Let me explain.

Selling naked puts against any of these stocks would accomplish two things: They would net really large absolute dollar premiums, and they would provide ample downside protection should the stock fall. And since these are all great businesses I’d be happy to own, it makes for a happy medium.

Just remember: A put means you could get the stock put to you at the strike price, so you still face some risk of having to buy high-priced shares. With such huge premiums, however, you are getting large downside protection.

Google

Google seems pricey on a P/E basis initially, but it has a whopping $150 per share in cash, meaning it’s effectively trading at $539 (its actual price as of writing is $691). With analyst estimates at about $4 per share in earnings and 13% long-term growth, it actually is close to a PEG ratio of 1, which is very acceptable.

Since the stock isn’t outrageously overvalued, then, selling the January 680 Puts for $19 is very attractive. However, I am also enticed by the January 2014 660 Puts, which are going for $60. It’s very tempting to jump on that premium, comfortable with the knowledge that I’d have downside protection to $600 per share while having intrinsic value covered down to $479.

Apple

Apple is a bit more interesting. I actually think AAPL might revisit its lows around $505. It’s tempting to just buy puts, but it’s too risky and I’m looking at Apple as a long, not a short.

I can sell the January 2014 500 Puts for $50, and still have downside protection to $450. With $119 per share in cash on hand, Apple trades at an effective price of $456 per share, or 9 times earnings on 20% long-term growth. That’s a bargain, and it’s a trade that seems very safe to me — even safer than the Google trade.

Amazon

Amazon is the trickiest of the bunch. I believe in Amazon as a business; it’s not going anywhere. But it has $12 per share in cash, so it’s not in the same league as the others from that standpoint. Also, its earnings are volatile. AMZN is shaping up to be a more erratic play in that regard than I expected, so valuing it was like valuing Pixar, whose earnings would fluctuate year to year.

I think Amazon could go either way, but the January 2014 220 Puts are going for $22.50. That’s a 10% premium, in line with the other stocks mentioned, and that offers downside all the way to $195. I think that’s plenty of room to consider this trade.

Any other thoughts that you might have on these high-dollar stocks? I’d like to hear them.

As of this writing, Lawrence Meyers[4] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[5], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com[6]. He also has written two books[7] and blogs about public policy[8], journalistic integrity[9], popular culture[10] and world affairs[11].

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Endnotes:
  1. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. Lawrence Meyers: mailto:pdlcapital66@gmail.com
  5. PDL Capital, Inc.: http://www.pdlcapital.com/
  6. SeekingAlpha.com: http://seekingalpha.com/author/larry-meyers/articles
  7. written two books: http://www.investorplace.com/author/lawrence-meyers/
  8. public policy: http://biggovernment.com/author/lmeyers/
  9. journalistic integrity: http://bigjournalism.com/author/lmeyers/
  10. popular culture: http://bighollywood.breitbart.com/author/lmeyers/
  11. world affairs: http://bigpeace.com/author/lmeyers/
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