How to Play the Apple TV Revolution with Options

by Jason Jenkins

How to Play the Apple TV Revolution with Options

It wasn’t said outright, but Piper Jaffray analyst Gene Munster thinks Apple (Nasdaq: AAPL) CEO Tim Cook was sounding the alarm. Munster and many industry pundits and bloggers have been looking at Cook’s comments from the All Things Digital Conference late last month with great interest.

“The message that I think Tim Cook intended to send was don’t buy a TV, we’re working on something,” Munster says. Munster has been snooping around other avenues and he’s pretty sure we’ll see a new Apple TV relatively soon. What he’s not exactly sure of is the “when.”

“They could announce a new Apple TV as soon as December,” he says.

In the past, Munster has said the new Apple TV – or iTV – will be “the biggest thing in consumer electronics since the smartphone came up.”

Where There’s Smoke, There’s Fire…

Here are three other sources on the manufacturing side that point to a new iTV coming soon:

  • China Business News reports that Foxconn, Apple’s Chinese manufacturing partner, has already started a pilot production of the new Apple HDTV. They say their sources tell them that a Foxconn factory in Shenzhen has received orders for an Apple “smart TV” and is producing them on a trial basis.
  • Another Chinese publication, WantChinaTimes, quotes Lao Cha, an industry observer, who said, “The advent of the mobile internet has paved the way for digital convergence, prompting Apple, Samsung and other international brands to branch out into smart TVs. Smart TVs play a critical role in digital convergence. Cloud computing and equipment linkage will be key to the success of equipment suppliers.”
  • According to Canaccord Genuity analyst Michael Walkley in a note to clients, “Following our supply chain checks, we have increased confidence Apple will launch a 50-plus inch LCD-TV product by [the first fiscal quarter of 2013].”

Much Ado About Content

Many analysts are hung up on the idea that Apple won’t release a television if it can't do something special with content. Munster thinks this is wrong. Apple television will take off not because it will conquer cable television, but because of the interface that it will give its users.

[cfsp key="mid-content-callout"]

There’s a growing desire by users to have unbundled content. But we all know that the Comcasts (Nasdaq: CMCSA) of the world aren’t going to let that happen anytime soon. So Apple will need to improvise for the time being. Here's the rest of Munster’s take on what Apple can do with content:

  • Consumers are willing to pay more for each channel as long as their overall bill goes down (i.e. pay more for fewer channels you actually want). Apple has shown a knack for disrupting industries and will likely try the same here.
  • Unbundled channels and DVR will eventually be in the cloud. However this will take a few years. In the near term it will probably strongly resemble the current Apple TV content offering of streaming options.
  • The interface should allow users a new way to search, interact and record cable content.

Munster thinks it will be released in the first half of 2013, and he believes the prices will be $1,500 to $2,000, and screen sizes will be 42" to 55".

How to Play

In my eyes this will provide yet another reason for Apple stock to take off.

A few weeks ago, I wrote about how to play Apple stock for less with options. I suggested using a bull call spread (vertical call spread) where you buy call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike.

If you agree that Apple is poised for a boost with a TV offer in the next six months to a year, you may want to look into this approach… Here’s a closer look at how it works:

A bull call spread is used when you believe a security is going up. The most you can gain is the difference between the strike prices of the long and short options, less the net cost of options. Here’s that example again.

In the March 26 issue of Barron's, Striking Price columnist Steven M. Sears gives a pretty good example of how this works:

“With Apple at $601.31, investors can buy Apple's January $600 call that expires in 2013, and sell Apple's January $700 call that also expires in 2013. The position costs $37.50, and lets investors benefit if Apple's stock hits $700 by next January.

“If Apple's stock advances as expected, investors who used the Apple call-spread strategy-buying the January $600 call and selling the January $700 call will make a 168% return on their investment.”

Of course you get limited return if the stock goes above $700 because you don’t own it. But keep in mind that one of the great things about this spread trade is that the expense you incur by purchasing the at-the-money call option is offset by the income you receive from writing the out-of-the-money call option - and this is why your net expense for the trade is much smaller.

And for those who aren’t comfortable with options, consider a small semi-conductor company as play on iPhones and iPads – Cirrus Logic (Nasdaq: CRUS).

Cirrus Logic is the sole supplier for audio codecs in iDevices (iPhones and iPads). It derives 50% of its revenue from Apple. I’ll keep you posted as I hear more…

Good Investing,

Jason Jenkins

comments powered by Disqus