Follow Up – (AAPL) October 9, 2012

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.

FOLLOW UP
Explanation to Previous Trade:

Trade Alert – (AAPL)

UPDATE ONLY- Buy the (AAPL) January, 2013 $525-$575 Bull Call Spread at $37.50 or best

Opening Trade

10-9-2012

expiration date: 1-18-2013

Portfolio weighting: 10%

($10,000/100/$37.50) = 3 Contracts

The last several years shows us that periodically, Apple pulls back $100 for no other reasons that profit taking. The PE multiple has just dropped from 11 to 10. Cash is still pouring into the company at the rate of $200 million a day or more. We are already about $80 into this move down, so I am going to start scaling back into the position that I stopped out of eight days ago. This is a bet that the multiple doesn’t drop again from 10X to 9X for the world’s best and most profitable company.

After the launch of the long awaited iPhone5, the firm has been hit by the perfect storm of glitches. First, the company’s initial foray into mapping software didn’t work. Then there were scratches on the cases. The strikes at Apple’s principal manufacturer in China, Foxcon, didn’t help. Yesterday, I learned that a blue tint appeared in flash photos. If you only want to buy when there is blood in the street, that time is fast approaching for Apple.

The bad news was enough to prompt several managers to lock in profits before the year end. Apple has been the top performing stock this year for almost everyone. They may also want to duck some volatility ahead of the presidential election, which has suddenly become a race once again. But the Apple story is still there in all its glory, and despite the recent disappointments with the iPhone 5, you still can’t buy one, even at $900 without a contract. Soon we will have the iPad mini to factor into the equation.

The particular attraction of the (AAPL) January, 2013 $525-$575 Call Spread is that the upper strike is bang on the 200 moving average for the stock. This will be my line in the sand. See, there is a method to my madness!

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 buy the legs individually or you will end up losing much of your profit up front. If you don’t get filled, then just wait for the next Trade Alert. There will be many fish in the sea.

The same applies if, for any reason, you don’t understand this trade. Better to watch this strategy unfold on paper in the model portfolio before you try it with real money.

Keep in mind that these are ball park prices only. Spread pricing can be very volatile on expiration months farther out.

Here are the specific trades you need to execute this profitable position:

Buy 3 X (AAPL) January, 2013 $525 Calls at………………. $112.20
Sell short 3 X (AAPL) January, 2013 $575 calls at………….-$74.70

Net Cost………………………………………….…………. $37.50

Maximum profit at expiartion = $50.00 – $37.50 = $12.50

($12.50 X 100 X 3) = $3,750, or 3.75% for the notional $100,000 model portfolio.