As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Further Explanation to: Trade Alert – (TBT)
Sell the Apple (AAPL) May, 2013 $320-$350 Call spread at $29.85 or best
expiration date: 5-17-2013
Portfolio weighting: 10%
Number of Contracts = 4 contracts
Nothing beats instant gratification. Bragging rights are nice too.
On Monday, when I strapped on this trade, angry readers emailed me to tell me that I was truly out of my mind. Apple was an ex-growth company, had lost its ability to innovate, shed its “cool” factor, and had fallen behind Samsung with its large screen smart phone. The shares were clearly in a free fall to under $300, and I had to be “Mad” to urge people into the stock at $395.
The Tuesday Q1, 2013 earnings changed everything. Revenues blew out to the upside at $43 billion, profits surprised at $9.5 billion, and earnings shocked, coming in at $10.09. Analyst forecasts minutes earlier ran as low as $8. The company sold a stunning 37.4 million iPhones and 19.5 million iPads.
Best of all, it returned a wad of cash to shareholders; increasing the dividend by 15% and boosting its share buyback program to $60 billion. It can afford to do so because it has an unprecedented $145 billion in cash on its balance sheet.
Not only is Apple now a value stock, it is a high yield value stock, offering investors a 3% annual yield at these prices, compared to only 2% for the S&P 500. Pension funds will not ignore this for long.
All of a sudden, Apple has recovered its “cool” factor and is back at the forefront of innovation. Its dominance in apps and iTunes gives it a huge sinecure in risk free income. The six or so new products it will launch in the fourth quarter of this year, like a low end smart phone for emerging markets, Apple TV, the iPhone 5s, a deal with China Mobile, and new generations of iPods and Ipads, all look incredibly interesting. What a difference three days makes!
So it is time for me to take profits on my (AAPL) May, 2013 $320-$350 Call spread. I’m really doing this so I can print out the confirm and carry it around in my wallet next to my spare condom. That way I can whip it out and prove to any bar challengers that I made money in Apple on the long side this year, no easy task.
I am also encouraged to take profits here because I have captured 95% of the potential profit in the call spread. Why bother carrying a position in one of the most volatile stocks in the market for three more weeks for an extra 2 basis points?
For options traders, there was something really interesting that happened to Apple this week. Although the shares have risen only $15, or 3.8% in three days, the value of my deep out-of-the-money call spread has soared by 11.4%. That is because implied volatilities on the options have completely crashed. This suggests that the last bottom in Apple shares at $392 is the final one.
I think there is a high probability that the final bottom is in for Apple shares. Sure, the Q2, 2013 revenue forecast was dire at only $34 billion, but everyone expected this. We will know for sure if the stock can break the 50-day moving average at $435. If it does, then it is off to the races once again, and $500 becomes a chip shot. That means flipping from selling rallies to buying dips, possibly for years. But it will take years to breach the old high of $706 once more.
Let me tell you how they could get there. What if the Federal Reserve normalizes interest rates and raises overnight rates from zero to 2%? Apple’s $145 billion cash mountain would throw off an extra $3 billion in interest income a year, boosting the company’s profits, and possibly its share price, by a third. Imagine that? Steve Jobs’ ghost must me laughing!
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Sell 4 May, 2013 (AAPL) $320 calls at……………$89.75
Buy to cover Short 4 May, 2013 (AAPL) $350 calls at.…….$59.90
Profit: $29.85 – $26.80 = $3.05
($3.05 X 100 X 4) = $1,220 – 1.20% for the notional $100,000 model portfolio.