After last week’s blowout earnings, Apple (Nasdaq: AAPL) shares caught fire, jumping over $60 in 24 hours.
Despite all that investor activity, with shares over $600, many argue it’s too expensive and will end up collapsing under its own weight.
After all, with a market cap of over $500 billion, Apple’s valued at two times the publicly traded gold companies, combined.
Seems like a lot, but when you look at fundamentals (i.e. growth, cash, price-to-earnings, dividend yield, marketshare) and just about every other measure there is, Apple appears reasonably priced. Even a bargain!
But stellar fundamentals aren’t the real issue for most people…
The Highest-Hanging Fruit
The real issue is that a $600 share price is out of reach for almost everyone, regardless of which way they think the stock will head.
[ad#Google Adsense 336×280-IA]No one in their right mind wants to short a $600 stock that can move by 10% in one day.
First of all, the margin requirements to short a $600 stock are absurd.
Talk about not being able to sleep at night! Surely there are better shorting candidates out there.
Still, you can see the appeal to shorting Apple, as it can easily fall $60 in a day or two – it did so just last week.
The upside has its own appeal, but is just as outrageously expensive.
Most analysts have been behind the curve on this one. Now they’re jumping out in front and putting up price targets of over $1,000 per share, touting that the company’s on the fast-track to being the first trillion-dollar market-cap stock.
Either way you cut it – upside, downside – $600 a share is a lot of money. And when you can get stopped out for a fat loss in one day, you might be in for a painful experience.
Here’s the solution for playing Apple whether you want to go long or short without losing your mind or a ton of money…
Easy As AAPL Pie!
The answer lies in using a particular type of options trade called a “spread.”
A spread is the difference between two points. In options parlance, it’s the difference between two price points.
In order to do a spread, you need to make two transactions, a buy and a sell.
Let’s assume you think Apple is headed to $800 in then next 12 months. And let’s say you have $10,000 to invest…
You can buy Apple shares for $600 each and pick up 16 shares. At $800 per share, you’ll make $3,200. Not bad.
But you can make a lot more if you use what’s called a “bull spread.”
If you’re in the $800 camp, you can buy the January $700 call options for $37 and sell the January $800 call options for $17 to give you a net cost of $20 per contract.
This means that you can buy five contracts for $10,000, giving you control of 500 shares of Apple at $700 per share. If the shares move to $800, you would make $80 per share net ($100 profit minus the $20 cost) for gains of $40,000.
That’s 13 times the amount you would make by buying the shares outright if that target was reached.
Bottom line: It really is the $40,000 question. Will Apple head higher or will it back off? If you’re in the camp that it’s headed to the moon, then jump on the options and not the stock.
Ahead of the tape,
Karim Rahemtulla
[ad#jack p.s.]
Source: Wall Street Daily