Apple is Trading for $242… Here’s How to Control the Shares for $11.50
by Karim Rahemtulla, Options Expert
Tuesday, April 13, 2010: Issue #1237
It’s no secret that Apple (Nasdaq: AAPL) shares are on fire.
Since the stock hit its 52-week low of $115 back in April 2009, the price has surged by 110%, with the recent launch of the iPad providing a further boost.
But at $242 per share, most investors haven’t bothered investing in Apple. And that’s too bad… because just like Google (Nasdaq: GOOG) did when it hit a similar level, Apple probably has much more fuel in the tank.
When shares hit triple-digit price territory, it often proves a major barrier to investors, who tend to think in terms of number of shares, rather than the amount of dollars invested.
It’s no surprise, really. Investors are trained to buy low, thinking that the more we own, the better off we’ll be. Not an uncommon way of thinking – but untrue.
So what if you could control Apple shares for $11.50 instead of buying them for $242?
For Apple, “i” Equals $$$
There’s no question about it: Apple’s “i” line will go down as the biggest technological hit since the introduction of the PC.
Steve Jobs and his brain trust at Apple have catapulted the company to a level above and beyond what anyone thought possible by making communication better, simpler and more interactive.
Apple’s technology is fun and easy to use – and the iPad is no exception, having sold hundreds of thousands of units over its first weekend of release. By offering a PC in tablet form, it does what all PCs do, but with key differences: It does so with the simplicity of a touch-screen and in a style that is appealing to the human eye.
However, the ultimate success of the “i” series won’t be measured in terms of the products created, but in the legions of users who will buy anything and everything Apple.
And right now, the company appears to be able to deliver better than ever – both for users and investors.
Based on the sales and earnings numbers that Apple is churning out, major Wall Street firms estimate that the stock will cross the $300 mark within a year or so. Even the low $300s would be a 25% gain from current levels.
So, how can you make money if you missed the boat at $80? More importantly, how can you control Apple shares for $11.50 and still make two to three times your money?
Feeling Bullish? Then Spread Your Risk
The answer is to enter a LEAP bull spread.
Don’t let the name put you off! Here’s what the two parts mean:
- LEAPS: LEAPS stands for Long-Term Equity AnticiPation Securities. In other words, they’re long-term options, which give you the advantage of having more time to be correct with the trade and risk less money upfront than you would do by buying the underlying shares outright.
- Spread: An options spread trade means you’re buying two different call options. You buy one option at a lower strike price and sell the other option against the position at a higher strike price.
Because Apple options are expensive, this is the perfect time to execute a LEAP bull spread trade, so you can make Apple as cheap as a small-cap stock.
In this case, the best-looking trade is a spread that has almost nine months to work. We’d play it like this:
- Buy the Apple January 2011 $260 calls for $21 per contract.
- Sell the Apple January 2011 $300 calls for $9.50 per contract.
Breaking down the numbers, the spread is worth $40 ($300 minus $260 = $40).
The net cost is the difference between the option prices. In this case, you’d spend $21 on the $260 calls and receive back $9.50 from selling. So you’re risking $11.50 per contract in order to make $40.
So what next?
“Ordinary” Investors Will Pay $242 for Apple… You Pay Just 5% of That
Since we have nine months for the trade to play out, we basically sit back and wait to see what happens with Apple.
- If the stock shoots even higher – as many people think it will – you could easily make three times your money (or more).
- But even if Apple shares hit the skids, you’d only have risked a very small fraction of what you’d have paid to buy the shares outright. In this case, that’s $11.50 – or just 5% of the $242 you’d shell out for a single Apple share.
- And if you want to bail out of the trade at any time before options expiration, you can do that, too. No need to hang on until the bitter end if you don’t want to.
(Please note: this trade is just an example of how the bull spread strategy works, not an actual recommendation. We will not be tracking it.)
Good investing,
Karim Rahemtulla
Any investment contains risk. Please see our disclaimer.
13 Responses to “Apple is Trading for $242… Here’s How to Control the Shares for $11.50”
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Please explain further.
What happens when the shares reach 300? I then have to deliver the shares to whomever bought the 300 calls that I sold, right?
Also, If I want to buy back the 300 call, the option will be very expensive as the stock price nears 300. I will loose money when I buy it back.
Am I right?
Grant
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So, perhaps I’m missing something…You’ve paid $11 for the 260-300 spread. if apple is below $271 (around 10% increase) by January, the spread looses money right?
Reply
Larry,
Yes, that is correct.
Investment U
Reply
This is a really useful suggestion, and a great demonstration of the value of leaps in an investment strategy. While the writer talks about a potential $40 profit, it doesn’t take too much to break even and one might also bail lowering the possible 9$ per share loss.
Reply
It would seem that you are risking $10.10 on todays prices. This strategy does not make any sense.
To be sure, buying the Jan 260 calls at $20.70 today, and selling Jan 300 calls at $9.20 today changes your costs basis as follows,
if exercised:
$260 + $20.70 = $280.70 (adding cost of option).
$300 – $9.20 = $290.80 (adjusting for income received by writing option).
Total benefit if exercised = $10.10 (difference between adjusted costs).
Hardly worth the cost of risk..
Reply
It would seem that you are risking $11.50 if these options expire.
To be sure, buying the Jan 260 calls at $20.70 today, and selling Jan 300 calls at $9.20 today changes your costs basis as follows,
if exercised:
$260 + $20.70 = $280.70 (adding cost of option).
$300 + $9.20 = $309.20 (adjusting for income received by writing option).
Total benefit if exercised = $28.50 (difference between adjusted costs).
We seem to be putting up $11.50 to potentially make $28.50.
Reply
Why aren’t you tracking this trade? Would love to use it as I’ve had past success with your LEAP in Xcelerated Profits.
Reply
Joe,
Investment U was set up as a way to encourage investors to learn more about the market. To do that most effectively, we have to use real trades and possibilities, such as the Apple example. But don’t worry, The 400 Report will have numerous other attractive trades as the year progresses onward.
Thank you,
Investment U
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When the price go above $300 but I don’t have stock on hand. Do I need to settle the Short Call $300 option but lose money? Or I better buy stock for the buyer to call out the stock?
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Lets say the stock goes to $300. To what value (price) will the purchased call and the sold call go? (Estimated, of course) Where is the cash profit? What should the investor then doo? Its just not clear where the profit is. Help.
Robert
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April 18, 10:45am
I am confused about this spread play for APPLE. I do not know whether it is a BEAR CALL SPREAD or a BULL PUT SPREAD.
Since the strike prices are so distance from each other, what is the margin on this play. We might be tying a lot of money down until January 2011. What is the profit potential for this play. We should take these parameters into consideration when we enter in these trade. It will help us think twice before we entire an expensive spread trades
Reply Please
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Adiaha,
Please note: the trade in the article above was just an example of how the bull spread strategy works, not an actual recommendation. We will not be tracking it within Investment U or the 400 Report.
Thank you,
Investment U
Reply
Why aren’t you tracking this trade? Would love to use it as I’ve had past success with your LEAP in Xcelerated Profits.
Reply