- Have you ever had a hunch about a stock but hesitated because it was too expensive?
Stocks with price tags above 100 bucks can tie up a lot of cash. Take Google (GOOG), Apple (AAPL) or Goldman Sachs (GS) — three of the biggest names on Wall Street. AAPL and GS will cost you nearly $200 for a share. And GOOG? You’ll have to fork over more than $500 for one share. Ouch!
The trouble is that all three of these stocks are up big this year. And if you missed some of these gains because the stock was a bit too pricy, well, that’s a shame. But there’s another way to capture the gains in these stocks for just a fraction of the share price … options.
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A Cheaper Way to Profit
With options you can lease the movement of a stock for various lengths of time for far less than you’d pay for the shares outright. For instance, did you know you can lease the price movement of Google (GOOG) for the next three months for around 6% of the current share price? That’s right, rather than paying more than $50,000 for 100 shares, you can buy an option that expires in January for around $3,000. You can also sell put options to try to enter the stock at a lower price, while collecting a premium.
One major benefit of using options is that you pay less while getting a bigger bang for your investment dollar. In fact, you can usually get five times (and often more) the return of a stock using a cheaper option. So if GOOG goes up 10%, your option may very well return 50% or more.
We’ve selected a few of these high-priced stocks that we think you may be interested in. And we’re going to show you what options to buy or sell based on where we think the stock price is headed over the next few months. Keep reading to see just how affordable it is to play these high-priced names.
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Apple (AAPL)
By Chris Johnson and Jon Lewis
Wouldn’t it be nice to be able to invest in Apple (AAPL) for less than the price of an iPod Shuffle (retail price $59)? This technology wizard is now positioned to take out its all-time highs at $200. We’re seeing signs that the “crowd” is ready to push the stock to new highs as we head into the new year.
So position yourself for a year-end run in AAPL by buying the AAPL Jan 175 Calls (APVAO). Using this option, you can “control” 100 AAPL shares for less than $2,500 instead of paying $19,000 for the stock. A move to $220 would result in a 100% return on this option, while shareholders would net just 16%.
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Google (GOOG)
By Nick Atkeson and Andrew Houghton
Google (GOOG) just keeps getting bigger and better. It is the largest provider of software as a service, which appears to be the dominant software distribution business model. It is moving steadily into the desktop arena with offerings for spreadsheet and word processing to name just a few. It is also coming out with cell phone software. But with the stock now trading around $535, down from $750, what is an investor to do?
Imagine rather than paying $535 for one of the biggest growth companies in the United States, you could own GOOG at $350.
Here’s what you do: Sell the GOOG Jan 2011 350 Puts (OZFMK) for about $15 ($1,500 per contract). If the market plummets again and GOOG drops to $350 by expiration, you will be put the stock at this bargain-basement price. If the stock remains above your dream price, you keep the $1,500 times the number of contracts you sold as pure profit.
Learn more about selling options.
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Master Card (MA)
By Chris Johnson and Jon Lewis
The consumer has remained selectively active during the recession. Shoppers have found the wherewithal to continue spending, though now more within their means instead of in excess.
Besides the retail chains, a primary beneficiary of consumer dollars are credit card companies such as Master Card (MA). Like Visa (V) and others, MA benefits from the transaction fees racked up by those magnetic stripes swiping at the register.
We think MA has some catching up to do, and that the MA Jan 220 Calls (MALAD) provide a great leveraged option for the expected stock move given that the option costs about 7% of the current share price.
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First Solar (FSLR)
By Nick Atkeson and Andrew Houghton
The future is so bright, we have to wear shades. First Solar (FSLR) was a $300 stock in 2008. The low on the stock during the past 12 months is close to $100. FSLR is currently trading at about $150, roughly in the middle of the range. If you think solar energy is the way of the future and the industry will advance into 2011, options provide an interesting way to gain exposure while reducing your cash outlay.
If you buy the FSLR Jan 2011 200 Calls (LLGAE) for about $20, you can finance this upside exposure by selling the FSLR Jan 2011 100 Puts (XOLMT) for about $13 and the FSLR Jan 2011 300 Calls (LLGAT) for about $8. This trade will result in a net credit of $1 ($21 in premium you collected minus $20 paid for the calls), and you win if FSLR trades anywhere from $200 to $300 per share between now and January 2011.
And if the stock trades below $100 at expiration, you will be put the shares of one of the highest quality, blue-chip solar companies at an incredibly attractive price. This looks like a win/win to us.
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Goldman Sachs (GS)
By Chris Johnson and Jon Lewis
Despite ae downgrade from Meredith Whitney, there’s no denying that Goldman Sachs (GS) has been the gold standard for the financial stocks throughout the credit crunch. Strong fundamentals and a great chart make the stock an attractive addition to an investor’s portfolio, but it’s a little on the expensive side at around $190.
The April 2010 190 Calls (GPYDR) offer an attractive option alternative to the pricey shares. With a current asking price that’s around 10% of the share price, these options will appreciate dollar-for-dollar with the stock.
Looking forward, if GS trades at $250 on the third Friday of April (options expiration), the stock would net a 32% percent return, while this option would return around 125%.
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Goldman Sachs (GS)
By Nick Atkeson and Andrew Houghton
The Goldman Sachs (GS) guys are smart. The have made money in some of the most difficult markets we have ever seen. They also have a lot less competition in the wake of the financial crisis and the elimination of Bear Sterns, Lehmann Brothers and Merrill Lynch. GS has become the go-to bank for both large equity and debt financings.
Although the stock is on a tear and we believe it could go higher, we want to act more like Warren Buffett than Speed Racer. We believe, over the long-term, value is more sustainable than momentum. As a result, we recommend selling the GS Jan 2012 100 Puts (WSDMT) for about $6.35. If you are put the stock at $100, you will take ownership at about $10 more than where Buffett started buying. If the stock stays above $100, you will keep the premium as pure profit.
