How To Buy Apple Below The Market And Earn High Options Yields

By Robert Hauver

Apple, (AAPL), has been much more volatile ever since the US Dept. of Justice announced an investigation into possible e-book price fixing, dropping from its high of $644.00 down to a $572.98 close this week. Adding to the volatility is the anticipation for AAPL’s next quarterly earnings report, scheduled for Tuesday, April 25th.

AAPL has reported spectacular earnings growth over the past 4 quarters, and has surprised to the upside in the “Earnings Surprise” game in 3 of the past 4 quarters. The table below shows the Post-Earnings Share Price changes on the day following each earnings report.

AAPL’s “stumble” in mid – Oct. 2011, when it reported a mere 52% EPS growth and missed inflated analyst expectations, happened during last fall’s high volatility period. The share price only fell -5.59% the day after earnings, but fell from $422.24 to a low of $363.57, (a 13.90% drawdown). during the Nov. market pullback, finally recovering on Jan. 6, 2012, and is currently approx. 36% above its Oct. 18, 2011 price, as of 4/20/12:

AAPL-EARN SURPRISE

After AAPL’s stellar Q1 Fiscal Year report, analysts have kept raising earnings estimates for next Tuesday’s report, with growth forecasts that leave AAPL’s mega-cap peers in the dust.  Looking at AAPL’s past quarterly EPS growth numbers, though, one can hardly blame them for getting so excited.

With estimates and expectations so high, one wonders if AAPL can possibly avoid “disappointing” analysts next Tuesday, while still turning in strong growth figures? Moreover, how will the market react?:

AAPL-Q2-2012 CONSENSUS

So, how can you profit from AAPL’s current volatility and 12.6% pullback?  The prudent approach is probably to wait for next Tuesday’s results and market reaction, but what if AAPL blows out its earnings once again, and soars out of reach?

Fortunately, AAPL has rather high options yields, so, a conservative way to profit in this situation, even if AAPL soars, is to sell cash secured puts below AAPL’s share price, which, of course, is a rapidly moving target. Conversely, if the market is disappointed with AAPL’s report, and its price declines, its put option premiums will rise, including those on the many other strike prices below these put options, resulting in even lower break-even points.

You could sell puts at an even lower strike price in that scenario. As usual, you’ll get paid the put premium price within 3 days of making the trade.

There are 2 variables to this approach – Expiration Month and Strike Price. Here are some examples of the current put options payouts for 2 different put option strike prices that expire in August. Lower strike prices offer lower put premium payouts, but also have lower break-even prices.  The key here is to find a strike price far enough below AAPL’s stock price that achieves the balance between your risk tolerance and your target option income:

AAPL-PUTSTRIKES

There are more details on these and over 30 other Cash Secured Puts trades with high options yields in our Cash Secured Puts Table.)

The next table has examples of the current put options payouts for various expiration months, using the same put option strike price of $580.00. Put premiums are higher for longer expiration dates, which gives you a lower break-even, but a lower annualized yield, due to the longer time period. Again, the more conservative approach is to sell at strike prices further below AAPL’s strike price.

AAPL-PUTMONTHS

AAPL is due to join the ranks of dividend paying stocks sometime in the July-Sept. 2012 quarter, but hasn’t announced its ex-dividend date yet. (Note: Put sellers don’t receive dividends, we list dividends here for comparison only.):

Disclosure: Author is short Apple put options.

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

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

How To Turn Apple, (AAPL), Into An Income Stock

By Robert Hauver

Devotees of dividend paying stocks may find it strange to hear Apple’s name mentioned in an article about income stocks, but there is a straightforward, conservative way to earn income quickly from this well-run tech stock.

Even though AAPL doesn’t pay a dividend, income investors could earn just below 11% by selling put options on it. (See below for details).

Apple looks good in many metrics when compared to the Computer Hardware industry:

Apple Computer Hardware Industry
ROE 31.90 27.61
ROA 28.96 22.07
ROI 19.35 13.66
Income/Employee $1.36 mln $ .96 mln
Profit Margin 20.04% 13.47%
Debt/Equity NO DEBT 20.10%

However, it does command a valuation premium to its peers:

But AAPL doesn’t seem so pricy when you compare its earnings to its closest peer in the Personal Computer Industry…  Click here…to learn more