Apple (AAPL): A Stock Warren Buffett Would Love

Yes, you should buy AAPL stock, but consider these options strategies to grow your wealth

   

I own a Mac, as do my wife and two children.

Three of us own iPhones, the fourth, my student who likes to be different, is trading in his BlackBerry for an iPhone next month.

Three of us have iPads. The fourth traded me his iPad for a pair of Ray-Bans; he deeply regrets the move.

My Mac laptop data and applications are being ported to a Mac mini this weekend for all of $99 at an Apple Store.

I plan to upgrade to the new iPhone 5 in January, when my contract allows me to do so.

I have not used my Kindle in more than a year.

Is that enough disclosure? Oh, and my largest stock holding is Apple (NASDAQ:AAPL). And I trade AAPL puts, and calls, with some frequency.

You should too. Why?

Apple is now in Warren Buffett territory. He loves consumer brands that have great ongoing value that does not and can not go away overnight. He likes deeply discounted stocks based on their cash flow and cash flow prospects – and Buffett likes real cash flow. And he likes simple cash machines. Apple is all three.

  • Apple really is not a technology company, it is a consumer and brand company, according to BrandZ,  a firm specializing in this sort of thing; it’s the most valuable consumer brand in the world. (If you want a copy of the report shoot me at email at service@tradersreserve.com).
  • Apple is sitting on $121 billion in cash – that is more than the market cap of all but 17 companies in the S&P 500. By year-end 2013, the company could have more than $150 billion in cash, which would be 33% of its market cap.
  • Apple has limited-to-small market share in its primary market – cell phones – less than 5% of those to be sold by year-end. Apple has very small market share – probably less than 3% – in the worldwide market for computers. If you lump together net books, low-end laptops and tablets, it has less than one-fifth (based on volume) of the worldwide market in this category. The company has enormous headroom to grow, especially in China, where it could sign a deal with China Mobile and its 600 million plus customers sometime in 2013.

What should you do with all of this information? I already told you own the stock, but if you want a cheaper way to trade AAPL, here is how I play puts and calls.

  • Half the capital I have allocated to AAPL is in shares, the other half to sell to open (or short) puts. Believe it or not, shorting puts is actually a bullish move because if you short a put at $100, the higher AAPL climbs in value, the more premium the put loses and you can buy it back to cover at, say, $50 or even let it expire worthless.
  • I also sell (short) puts and calls around the way the stock is trading and my own cash and income needs. Look, even the most bullish stock is going to have off days, so selling calls against a favored holding can help you weather any pullbacks.
  • My favorite trade – it not the most profitable but it feels like I am cheating – is to sell a put or a call at 2 p.m. ET on Friday – an option that expires in two hours! Even with this risk-averse approach, I can do 8% a year or so with some help from the market. With this tactic, you get better premiums from calls.
  • During the course of year, without appreciation, you should be able to generate 18% or more a year with this strategy, perhaps even as high as 30%, again depending on how hard you work and the swings in the stock, which, in turn, determine the premiums on the options.

What should you do now?

First, do not be afraid. Apple has been hammered by profit-taking and the need for analysts to be contrarian – no kidding.  If you read just the headlines, the first paragraphs of statements and listen to the blow-dried pundits on television, they say it is time to move on. That is the worst investment advice I have ever heard given in public. Even if AAPL retraced 100 or 150 points, it is a great buy.

Second, if you own 100 shares or more, sell to open (short) a December or January call. The stock should not move too much past $620 by year-end. It will probably stall for a while around $600, giving you time to buy back to cover the call if it is on a run to some point past $620. January calls expire before the company announces earnings on Jan. 22.

Third, if you are so inclined, sell (short) a put. There are two tactics. There’s the “silly” bid: short a put with a strike price where you would want own the stock regardless of any other factor; to me that is $520. Or, you can sell closer-in, more lucrative puts; I see mid-term support around $540.

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