Apple Shares Hit $600 Ahead of iPad Release
online.wsj.com
online.wsj.com
The thing about options is that they are a timed contract. Come expiration date, the value of the option depends %100 on the stock price. Before the expiration date, the value of the option is the intrinsic value (how much it is in the money) plus a time premium.
Over time, this premium erodes. When stocks are very volatile, the premiums is rather high, and thus the return on the option is impacted by this premium.
With a spread, since you're buying and selling both, you lower your total cost, while still capturing the profits in the range between the two strike prices. This means you're also selling premium at the same time you're buying it, reducing the impact of volatility on your costs and returns.
For instance (this is not an endorsement of this trade, just an example) you could buy the JAN 2014 $450 CALL and sell the JAN 2014 $550 CALL.
Let's compare that to just buying the $450 call.
The 1/2014 $450 CALL is $186. (Current price is $585, so this $186 is about $130 in intrinsic value and about $50 in premium.) If you buy that you've got $18,600 at risk. (A call contract covers 100 shares.) This is a lot cheaper than buying 100 shares of Apple which would cost you $58,500.
However if you enter into the spread, you buy the $450 call for $18,600 and sell the $550 call for $126 X 100 = $12,600 costing you a total investment of $6,000. When you make that sale, you're selling about $36 in intrinsic value and collecting $90 in premium.)
Lets consider three scenarios for Options expiration in January of 2014: Apple at $400, $500, $600 & $700.
Apple at $400: Long the stock: You've invested $58,500 for 100 shares of stock that are now worth $40,000. You've lost $18,500. Buy the $450 Call: You've invested $18,600 in calls which are now worthless[1] because the stock is at $400. You've lost $18,600. Buy the $450-$550 spread: You've lost $6,000 in a spread which has expired worthless because the stock is at $400.[2] Result: The spread wins.
Apple at $500: Long the Stock: $58,500 invested in 100 shares now worth $50,000. $8,500 loss. Long $450 Call: $18,600 in calls which are now worth $50 x 100 = $5,000. $12,600 loss. $450-$550 Spread: $6,000 in a spread that is now worth $5,000 = $1,000 loss. Result: The spread wins.
Apple at $600: Long the stock: $58,500 invested, now worth $60,000 = $1,500 profit. Long the $450 call: $18,600 invested, now worth $15,000 = $3,600 loss $450-$550 spread: $6,000 invested, now worth $10,000 = $4,000 profit Result: The spread wins
Apple at $700: Long the stock: $58,500 invested, now worth $70,000 = $11,500 profit Long the $450 Call: $18,600 invested, now worth $25,000 = $6,400 profit $450-$550 spread: $6,000 invested, now worth $10,000 = $4,000 profit Result: The stock wins.
Now, there are several factors I haven't illustrated here.... the main one being returns. The spread is much, much cheaper than the others, so when it profits, by a returns basis, it does much better.
The other factor is, the likelihood of Apple being $550 in 2014 and the likelihood of it being $700 in 2014 are not the same. Generally, the lower the price you're "betting" on, the more likely things are to end in the money.
Finally, a lot more people have $6,000 to risk than $18,000 or $58,000.
Hope this is useful. I highly recommend reading McMillins "Options as a strategic investment" (not sure about the author name, very sure about the book title.)
[1] Of course if things weren't working out as you expected by the summer of 2013, you could probably have rolled over from January 2014 to January 2015 for a small fee. If one had bought Jan 2009 Calls and the 2008 crisis happened, and they decided to roll over to 2010, they probably would have preserved their investment. Options give you options, but you have to pay more attention to them than the stock. If you bought the stock in 2006 you could have forgotten about it until today and then been pleasantly surprised.
[2] Spreads can be rolled over as well, like the call option was, by entering a trade that sells your long position while simultaneously buying a long leg at a later expiration and buys your short position while simultaneously selling a short leg at a later expiration. You can enter transactions that involve four legs (or more) and have them all execute simultaneously (or not at all if they can't all execute.)
As long as they're that packed, expect the share price to continue to rise.
You can a) order and pickup b) order and have it delivered or c) browse the physical store, scan and pay ... all without talking to anyone. No paper receipt or bag either.
-Warren Buffet
Aim for buy high and sell higher instead.
While I see further growth to maybe $700 with the new iPad/iPhone hype, I fail to see that much of money, new products and momentum for the stock to get all the way to $1,000. But rest assured, I was wrong before.
They've sold about ~60M so far worldwide in 2 years. I'm a tech nerd in a rich part of Chicago and I know more people that want iPads than have them.
Every event, every earnings call includes some version of "We're in the Post PC world. We only sell 1/4 of smartphones. We only sell 1-2% of phones. We only sell ~8-10% of computers. Even though we're the biggest company in the world, we have a ton of room and our growth rate isn't even slowing yet."
Apple is not close to saturating its market, except iPods, which it is cannibalizing itself with iPhones.
It would be nice to think that the market has woken up and realized that Apple, growing at %100 a year is worth a 20X PE -- that would be a stock price of $960 on a forward estimated PE basis...(it's something like 16X right now) but the multi-year trend is lower PEs on Apple, and I don't think things have fundamentally changed on that. Everyone thinks "Law of large numbers" will eventually keep Apple from growing fast.
I prefer to buy when its getting no respect.
Also, I think that the media reporting the stock when its at $600 which is a pure momentum story (while being quiet about the fact that it was a great buy at $365 on a purely valuation basis) is a big part of the reason people think that index funds are the way to go. And they are if you're emotions have you thinking "I'd better buy now before the train leaves the station!!!!"
If you bought yesterday at $580, well, keeping your shares for 5 years is the only reason to buy (unless you're a trader) and your best bet is probably to just not look at the stock price for 5 years. Unless you're the kind of person who can buy at $580, and watch it go back to $360 over the next 6 months, hitting, in order $520, $580, $480, $550, $450, $600, $500, $400, $360 in the process! If it does that, when it hits $360 will you be thinking "Damn, this is the screaming buy of a life time! Back up the truck!", or will you have gone all in at $550 & $600 on the way down?
(Sorry for the stock talk, but the the stock price is the news.)
Just tangenting off of that: Since many indexes are weighted by price, I find myself wondering if index fund investing has an element of "buy high, sell low" to it. For example, right now Apple alone represents a huge percentage of the S&P 500,* and at the beginning of September 2008 it was weighted heavily toward a number of financial firms who were soon to be making a lot of appearances in newspaper headlines.
Back to the price talk, though, what's striking to me is that even though its price has been skyrocketing, AAPL's P/E is still comfortably lower than GOOG or YHOO.
* (And that alone should argue for thinking twice before buying Apple stock if you already have any money in an S&P 500 index fund. I have more money in Apple than any other company, and I've never personally purchased a single share of their stock.)
Especially the 1Q AAPL curve: very bubble-y. I'd be much more prone to buy if it was a steadier growth curve instead of an exponent.
By that weekly chart, I think a good price for Apple would be $420.
I'd be much happier if it had gone up to $450 on earnings (like it did, those were fantastic earnings) and then settled down somewhere in $400-$450.
Only if you buy shares of the fund when they are high, and sell when they are low.
An index fund that buys a set of stocks in proportion to market price at one point in time will automatically capture the relative gains and losses within that set.
If Apple's share price doubles, then the market value of its shares that the fund owns will also double, and it will occupy a relatively greater percentage of the fund's portfolio. Companies with a flat or declining share price will account for a relatively lesser percentage over time.
Some buying and selling needs to happen, to accommodate new investors and to handle turnover within the target index, but the point of passive index funds is that you don't need trades to capture market performance.
But there is a very real phenomenon-- when the price is high, people want to buy, when the price is low, people want to sell.
I had a friend who was a gold dealer and I would talk to him periodically about his experiences. When gold prices are high, he'd be out of stock because everyone would turn up in his store wanting to buy gold. (often because the media was talking about record gold prices and people would say "damn, I should have bought when it was $300! I'm buying now!")
When the price is low-- gold dropped to $1,500 or so lately-- people sell because they think its a bad investment. A lot of those people selling at $1,500 bought at $2,000 and have watched it go down and are now swearing off of gold. (Without regard to the fundamentals that indicate gold will likely hit $5,000 in the next 5-6 years.)
Buy high, Sell low is the reason so many people think the stock market is a gamble. Their emotions got the better of them.
Also useful is to recognize that "high" and "low" will change depending on what time horizon you're looking at. Over 10 years, $580 is probably a really low price. Over 10 minutes, who knows.
I wouldn't buy common stock unless I planned to hold it for 5-10 years. For most people that's the way to approach it and buy these really stellar companies (you don't have to be in everything. Who knows if netflix is going to outperform everything on the market over the next 10 years or not. If you get a fantastic return from the stock you do invest in, its silly to kick yourself for not investing in the winner.)
I looked at Apple when it was $13 a share and said "Damn that's a good buy, they have $6 a share in pure cash." And I didn't buy. I didn't buy for a decade after that. I never thought Apple was a company I understood well enough, despite following the company for over 30 years at that point.
I made my first Apple investment in December 2011, around $380 or $390, and totally missed the bottom.
(Meanwhile in 2001, I knew there would be a housing bubble, placed myself to profit from it, knew it was going to burst and went short the housing market in 2007... a year early, but you don't complain about once in a lifetime setups like that.)
You're never going to time it perfectly-- I'm really proud of my 2007 discipline, to switch positions when every TV channel was screaming that I was wrong (actually one of the indicators that gave me confidence).
If I'd bought Apple at $14, and it had gone down to $10, was it a bad buy? With hindsight you can see it wasn't... the thing to nail is whether the company has a solid future. I didn't know when Apple was at $14, but I do know now. (And yes, they do. They've got a lot of growth and while Steve Jobs liked the term "magical" there's actually nothing magical about Apple at all. No special insight, no secret, just really solid execution and focusing on the right things. Any company could do it... the question is why they don't, not why Apple is able to do it.)
Finally, if you're willing to spend some time learning, I highly recommend McMillions "Options as a strategic investment". Its something like 1,000 pages. Read that and you'll really level up. (Options allow you to dial up, or down, risk as much as you wish. But they do take some focus and thinking. But they're not hard. You don't need to read the whole book, but if you do, you'll have passed a hurdle that says its time to spend some time playing with a paper account for about 6 months, then after that, you can start working with real money. You don't want to jump into options uninformed and full of confidence.)
BTW, you said you "don't play the stock game", and that's fine... you're making a valid point about the difficulty (impossibility?) of timing, and I wanted to respond to that for those who have an interest in playing the "game".
If you've ever studied finance, you'll get an even better appreciation of Apple and why it's doing everything right with regards to how they manage their cash, acquisitions, dividend/cash buyback policy, supply chain management, etc.
Over the years, I've learned it's more effective to: buy when there is doom and gloom (blood on the street), sell when there is nothing but good news (about the company, industry).
For example, when there is a crash and everyone is saying: wait some more, the bottom is not reached yet, it's all going to shit, then buy.
You should also always buy in steps, buy 30% now, wait some more, buy another 30%, wait some more, buy remaining 40%. This helps tremendously with your nerves and emotions.
1. Apple's Last quarterly earnings DID NOT include China's iPhone 4S sales. Plenty of room for growth.
2. the iTV will be another billion dollar revenue stream for Apple.
3. NFC. Apple earning $$$ each time 100+ million people use their iPhone/iPod touch to pay for something? we're looking at a whole new ball game fellas.
The company has proven over and over that it can branch out, and disrupt or define entire new markets... this is in addition to their incredible P/E ratio and unfathomably large cash hoard.
That and without stock splits, dividends, or stock buybacks.
The thing I strive for is to never need or want the market to do anything.... to always be positioned such that any way the market goes I'm happy. If the markets going my direction, I just let it. If it goes a different direction, I respond and then get to where I'm happy with it going that direction.
Of course the turns are the trickiest (but this is then also in the realm of trading and timing and most people don't need to do that... just buy a good company and hold it.)
This is the funniest thing one can ever say about investing, lol!
I would reply: f*ck the stock market: just remember to pick the right lotto numbers!
When I was a buy and hold investor, I'd calculate my expected return before buying the stock. You can actually calculate the percentage annual return you'll get from the stock before you buy it. Sure there's some risk, but you also can discount that risk. IF the risk discounted price you need to get the return you desire is higher than or equal to the current stock price, you buy the stock. My results from that were pretty eye opening-- every single stock where I followed that discipline, returned more than I expected over the period I held it (and I was holding them for the long term- 5 years or more.)
Of course I've also lost money by buying hot companies, or failing to exercise the discipline to limit what I was doing to mathematically rewarding choices.
I'll play poker, but never with more than $20 at risk. I've lost less than $5[1] my entire life in casinos because the games are not interesting because the returns are negative. I've never played the lotto.
I never take a position that does not have a risk adjusted positive return.
Maybe that takes more discipline than other people want to put into it... That's fine. I certainly can understand the difficulty of dealing with emotions... even if the numbers are right, how you feel about your position is often influenced by a variety of factors. Many people who go into the markets react based on how they feel, and so maybe it isn't a good choice to them.
But I'm not a gambler. (If I was, I'd play poker more for higher stakes-- I love it-- and even that's a game of skill... or I'd have at least gambled in some of my many trips to las vegas. I love las vegas, but have never gambled there[1].
I think common stock is one way for people to have a better life, with not that much effort, and not even that much discipline. I think the financial industry makes all its money by convincing people that its too difficult and that it would just be easier to hand it over to them....
[1] I have on several occasions fed $1-$2 into a slot machine, and gotten several alcoholic drinks from the cocktail waitresses, who I tend to tip well. I'm not counting theses in my losses because the value of the drinks exceeds what I "lost", and even if I did the total is probably around $20 or so. On another occasion my partner put $1 into a penny slot machine, but on the 20th pull, won $30 and immediately cashed out. That same occasion I spent a dollar on video poker, was up to $5, down to $0.50, got back up to exactly $1 and cashed out. Most of the $5 is the $0.25 I traditionally lose when traveling thru the Las Vegeas airport where I do a single slot pull each time.