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.
Buy the Apple (AAPL) March, 2012 $430-$460 call spread for a net cost of $26.75 or best
expiration date: 3-17-2012
Portfolio weighting: 10% when in the money
($10,000/100/$26.75) = 4 Contracts
To execute this trade you must open two positions simultaneously:
1) Buy The (AAPL) March, 2012 $430 calls at $65.25
2) Sell Short the (AAPL) March, 2012 $460 call at $38.50
The maximum profit occurs with Apple stock anywhere over $460 on March 17, 2012. Let’s assume that at expiration, Apple is at $460. Then the profit is:
March $430 call cost………………. $65.25
March $460 call premium earned…-$38.50
Initial net cost………………………. $26.75
total profit $30 – $26.75 = $3.25
($3.25 X 100 X 4) = $1,300, or 1.30% for a $100,000 model portfolio
Apple has had a great run here, and has just backed off $40, or 7.6% off its Thursday high. As much as I love the stock for the long term, I am not happy to buy it here.
What I am willing to do is bet that the shares will not fall below $456.75 over the next four weeks, a price just above where it was when it announced its blowout Q4 earnings three weeks ago. I can achieve this through putting on the deep in the money call spread outlined above.
If the stock keeps falling, I am happy to own it at $456.75. At that price, it will be selling for nine times earnings, with $100 in cash per share, which is rising at $25 per share per quarter. The shareholders meeting will be held next week where they could announce a 2% annual dividend, the first ever. After that, we see the launch of the Ipad 3 and the IPhone 5. There will be enough to keep this stock bubbling for a while.
Hedge funds do these kinds of trades all day long. It is somewhat sophisticated and requires a level three or four options compliance clearance. So if you don’t understand it, consider this an instructional trade only and don’t do it. Just watch and learn.
The other advantage of this trade is that it gives me a small “RISK ON” presence to balance out the predominantly “RISK OFF” portfolio that I have been running for the past month. If you do the trade, then run out and buy a new MacBook Pro at your local Apple store to assure that the share stay high. That is, if you can get in.