Apple Inc. (NASDAQ:AAPL) is slated to become the first trillion dollar public company and it won’t take much from here. It has a clientele base who are absolute fanatics about its products and they don’t mind over paying for it.
I do have bones to pick. First is with the current leader. Tim Cook kept the AAPL stock train on the rails but that’s about it. Since Steve Job’s passing, it remains an iPhone company. Innovation has been lacking, except when it comes to the financial engineering aspect. Debt went from zero to $100 billion quickly.
Is AAPL Stock Really Worth a Bet?
It does have a lot of cash, but just because rates are low doesn’t mean I should burden myself with debt. Especially when I am not putting it towards generating new growth. When Amazon.com, Inc. (NASDAQ:AMZN) issues debt, it’s because it needs to enter new markets. The company just did it to buy Whole Foods.
By now, you might be upset because I’m not worshiping at the Tim Cook altar, but this is nothing against AAPL stock. It is an awesome company and it has a rosy future. Therein lies my opportunity to go long today, even if it is near its all-time high.
Being as high as ever is not the same as saying it’s expensive. From a valuation perspective, AAPL stock has a price-to-earnings ratio one third smaller than Microsoft Corporation (NASDAQ:MSFT) and half that of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). So there is no doubt that I am investing in value today.
Technically, the story is a little different. Investors are uneasy at risking $175-per-share to buy a stock when it’s at an all time high. It is natural to think that there could be slightly better entry points in the near future.
So instead of buy the shares now, I use options to roll back the clock and risk my money with a 20% discount. The idea is simple, I collect money to sell downside risk against proven support.
If Apple stock holds above my level, then I profit. Worst case scenario, I own shares at a 20% discount from the current price, which was the price back in April.
If Wall Street experts are correct, AAPL stock should have substantial upside potential. Even up here, it’s trading 5% below the average price target and 25% below the high mark.
The Trade: Sell the AAPL Jun 2018 $140 put for $2.75. Here I have a 85% theoretical chance of success. Otherwise, and if price falls below it, then I would suffer losses below $137.25.
Selling naked puts is daunting, especially when the stock and the equity markets are near all time highs. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the AAPL Jun 2018 $140/$135 credit put spread, where there’s about the same odds of winning but with much smaller risk. Yet the spread would yield 20% if successful.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I simply need AAPL stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from selling too far. If they do, then I own the shares at a discount.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.