2 Ways To Hedge Your 2012 Apple Gains

By Robert Hauver

Could this be true? Apple fell on a big “up” market day Thursday, and is negative for the week so far, (-.05%).  Is the game changing, or is AAPL just taking a breather, as investors get a little skittish from a government E-book price fixing probe?

As you most likely know, AAPL has been one of the best stocks to buy for price gains year-to-date, and over the past year.  However, it slowed down its torrid pace in March, gaining 10.53%, vs. it 18.83% gain in February, and is up just 3.74% so far in April.

The mere fact that we’re calling a 10%-plus monthly gain a “slowdown” seems absurd, and illustrates just how well AAPL has performed, and how much the market has come to expect it to perform. But maybe it’s time to hedge your 2012 gains, with AAPL up almost 54% year-to-date, and up 100% from its 52-week low:

AAPL-PERF

AAPL-BETA

If you’d had the prescience to buy AAPL on its way up, you may be wondering which is the best way to hedge your gains. There are numerous ways to hedge, but selling covered calls is an options trading strategy that will create some immediate income for you, and also hedge some of your gains.

Below are two approaches to selling covered calls:

1. Longer Expirations: By selling call options further out in time, you’ll earn more call premium $, and achieve a lower break-even price. In the examples below, we’ve used AAPL’s opening price for 2012 as our cost, in order to show how much of 2012’s gains you can hedge by selling covered calls with various expiration dates:

AAPL-CALLS-TIME

As you sell calls at expiration months further out in time, your call premiums increase – the Jan. 2013 $625.00 call pays $76.10, and hedges over 35% of the year-to-date gain, vs. a $52.45 call premium for the nearer August call, which hedges approx. 25% of the gain.

Tradeoff: Your break-even cost of $328.00 is also lower with the higher Jan. 2013 call option premium, vs. $354.30 for the August expiration.  However, your annualized yield is lower, since it’s a 9-month trade, vs. only 4 months for the Aug. 2012 trade.  (As we don’t yet know what AAPL’s ex-dividend date will be for the 3rd and 4th quarter, we’ve speculated that it might fall before the August expiration. However, it would certainly fall before the Oct. 2012 expiration, and you’d receive 2 quarterly dividends with the Jan. 2013 trade.)

(You can see additional details for over 30 other high options yields trades in our Covered Calls Table.)

2. Higher Strike Prices: A more bullish approach would be to sell covered call options at a higher strike price, in order to leave more room for future potential price gains. If you think that AAPL has more room to run, you could sell covered calls at strike prices higher than AAPL’s current strike price. We used AAPL’s 4/12/22 price of $622.50 for this example, which shows the range of call option payouts you’d receive for 3 different Jan. 2013 strike prices.

Tradeoff: All 3 strike prices are above AAPL’s current price, but as you sell at higher call strike prices, you’ll receive less premium. However, the Jan. 2012 $640.00 call strike price leaves you $17.50/share in potential assigned price gains, vs. only $7.50/share for the Jan. $630.00 strike price.  As usual, the more call premium $ you receive, the lower your break-even is:

AAPL-STRIKES

Dividends: Apple announced in March that it will be entering the world of dividend stocks sometime in the July-Sept. 2012 quarter, paying $2.65/share quarterly.  Market commentators have increasingly compared AAPL, with its huge cash hoard, to other Tech dividend paying stocks, clamoring for a dividend payout.  CEO Tim Cook took their advice, and also instituted a 3-year $10 billion stock buyback plan that starts in October, which will mitigate the effect of employee stock option dilution of shares.

AAPL-DIVS

Valuations: AAPL’s PEG ratio might turn out to be much lower than 1.25, since they’ve exceeded earnings estimates handily for the past  3 out of 4 quarters.  Consider this: AAPL earned $27.68/share in its last fiscal year, which ended 9/30/12, and has already earned $13.87 in its first fiscal quarter, which ended 12/31/12. Since it’s already earned 50% of its past fiscal year’s profit in one quarter, it seems a reasonable bet that AAPL can grow its next fiscal year earnings by a lot more than 14.31%.

By the way, AAPL is also one of only 4 large cap stocks with 40%-plus sales growth over the past 5 years. Just imagine – they grew their sales over 41% through the Great Recession – what an accomplishment! So, the biggest market cap stock in the world is also a growth stock:

AAPL-PEG

Financials: AAPL’s Mgt. ratios and operating margin far outshines industry avgs., and it has no debt:

AAPL-ROE

If you haven’t gotten on board the AAPL bandwagon, any upcoming pullbacks may offer you a chance to do so. In our next article, we’ll detail a lucrative way to sneak up on this stellar stock.

Disclosure: Author is short Apple put options.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved