This week at its WWDC event, Apple Inc. (NASDAQ:AAPL) announced a few hardware introductions, including the “HomePod” smart speaker. Wall Street isn’t too enthused, with AAPL stock trading slightly lower in the wake of all its announcements, but that’s OK — Apple still looks good for some more long profits.
The HomePod device is expected to compete with the likes of Amazon.com, Inc.’s (NASDAQ:AMZN) Echo and Alphabet Inc’s (NASDAQ:GOOGL) Google Home smart speakers. Apple’s device isn’t cheap, at $349, so I won’t be buying one … but I still expect it to look slick and build up a fan base.
From an investing perspective, the HomePod doesn’t make me like AAPL stock any more or less than I already do. Apple’s still an iPhone company. I know many experts argue about the company’s forays into services and augmented reality, but I’m a skeptic for the short-term. Apple’s metrics remain a slave to the performance of the iPhone.
I trade Apple stock not based on what I think of it, but more based on how markets perceive it. I’ve recently shared many trades which have all been successful, much like this one that delivered fast profits with no out-of-risk pocket.
Click to Enlarge Technically, like many mega-caps, AAPL has been riding a rocket to new heights. That makes it difficult to find comfortable entry points without using options.
Fundamentally, Apple simply is undervalued, but Wall Street has always underappreciated Apple, so its low value isn’t enough to prop shares up.
I don’t like how Tim Cook runs Apple. I believe that if he doesn’t change his navigating skills, this behemoth will lose its edge. Luckily, he has a few years left on the clock that Steve Jobs handed him.
I have two major concerns: The obvious lack of innovation, and the level of debt. Tim Cook is bizarrely committed to growing debt. It went from zero just recently to about $85 billion. While debt is cheap these days, that’s no reason to pile it on — especially when it’s merely used for financial engineering. It would be more palatable if the money were used to finance new ventures.
Luckily, we have the “Buffett put.”
As we all know, Warren Buffett finally jumped onto the Apple bandwagon last year. He bought AAPL stock, has ballooned his position and is likely to add even more on dips. So, if I sell downside risk, I know the Oracle will defend my position for me. I’ve seen him do it in a much less worthy International Business Machines Corp. (NYSE:IBM) for a long time. He’ll definitely do it for an ATM like Apple.
How to Trade AAPL Stock
The trade: Sell the Feb 2018 $115 naked put and collect $1.25 per contract. This trade offers me a 90% theoretical chance of success. Otherwise, I would need to own the shares and suffer losses below $113.75.
Selling options naked is very risky because it has unlimited downside risk to zero. I can mitigate the risk by using spreads instead.
The alternate: Sell the Jun 2018 $120/$115 instead, where we have a slightly smaller buffer but with limited risk. The spread still delivers 11% in yield. Compare that with risking $154 per share with no room for error, then needing AAPL stock to rally another 11% just to match the performance of the spread.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
