Follow Up to Trade Alert – (AAPL) April 30, 2013

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 - (AAPL)

Buy the Apple (AAPL) June, 2013 $380-$410 Call spread at $25.20 or best

Opening Trade


expiration date: 6-21-2013

Portfolio weighting: 10%

Number of Contracts = 4 contracts

Its looks like Apple’s stock is going to close over the 50 day moving average today at $432. This is huge.

Everyone looking for the next sector for bulls to rotate into find only two big ones: technology and the commodity space. Given that China is still in slowdown mode, that pushes tech to the forefront, with Apple the big fat target.

I made a quick killing on Apple last week, buying at a two year low, with option implied volatilities at all time highs. It looks like there is room for another visit to the trough here, and I am going out to the June expiration. If the 50-day moving average holds, we could tack on another $30 very quickly.

Apple has been one of the great conundrums of the investment industry this year, the stock falling through the floor of any standard valuation model. When the shares were at $395, the stock is discounting a 12% drop in earnings per year for the next several years. Either something terrible is about to happen at Steve Jobs’ creation, or it is the “BUY” of the century. I believe it is the latter.

This is for a company that continues to earn $62 million per hour! It also has $145 billion in cash on the balance sheet, which works out to about $120 per share. Ex-cash, you are buying the operating company at a price earnings multiple of seven times, less than half the 15.5 multiple for the S&P 500, a level one normally associates with an imminent bankruptcy. Apple essentially has a Google (GOOG) type income statement with a JC Penny (JCP) valuation.

The reasons for the 45% plunge in Apple shares are really quite simple. This is a company that is notorious for its lack of concern about shareholders and its general antipathy towards Wall Street. While other companies carefully manage earnings expectations to reliably beat forecasts by a penny, you never see this with Apple. The earnings are what they are, take it or leave it.

This attitude allows Apple to bunch together new product releases without regard for the impact on the share price. When they deliver a series of rapid, successful product launches, the stock soars. This happened last September after the introduction of the iPhone 5, new iPads, and a new iMac, taking the stock up to an all time high of $706.

Then you get nothing for nearly a year and the stock crashes by a third. To see what I mean, look at the long-term chart below, where we have seen four corrections like this over the past decade. The pullback is bigger this time because it started from Apple’s position as the largest company in the world when everyone owned it.

There also is a compelling technical argument here. At $360 you hit a support level on the longer-term charts that stretches back two years.

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:

Buy 4 June, 2013 (AAPL) $380 calls at……………$57.10
Sell Short 4 June, 2013 (AAPL) $410 calls at.…….$31.90
Net Cost:………………………………....……..…....$25.20

Potential Profit at expiration: $30.00 - $25.20 = $4.80

($4.80 X 100 X 4) = $1,920 – 1.92% for the notional $100,000 model portfolio.

AAPL 4-29-13

Apple-Bite Ready for Another Bite