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Now Is the Right Time to Buy Apple Option LEAPS

by: Jason Schwarz September 19, 2008 | about stocks: AAPL    

Jason Schwarz

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In a Harvard Business School lecture given by Mark Sellers, we gain the following insight into what separates the great investors from the average ones.  He says:

The rarest trait of all is the ability to live through volatility without changing your investment thought process.  Most people have a terrible time not selling their stocks at a loss, they can't average down, they can't handle short term pain even if it would result in long term gain.

The panic instinct steps in and shuts down normal brain function including the ability to buy stocks when others are panicking and sell stocks when others are euphoric.  Everyone thinks they can do this but when October 19, 1987 comes around and the market is crashing all around you, almost no one has the stomach to buy.

If you're an investor with Apple (AAPL) in your portfolio, it's time to make some important decisions.  Many Apple bulls have sold out of the stock because of the widespread financial panic, but as this period of capitulation draws to a close it is time to position yourself for the bounce. 

If you own ETFs with Apple in them you should increase risk and move to AAPL stock.  If you own the stock you should buy in-the-money call options.  If you already own these, then you should move some capital to out-of-the-money call options.  This is the moment to increase your risk/reward level. 

As an options strategist, I am very cautious about discussing option LEAPS in articles because of their volatility, but this represents one of the few times I will do so.  We at Lone Peak Asset Management are buying a mix of the following call options:  January 2010 $140's for 30.00, April 2009 $180's for 6.00, and the most risky of all January 2009 $200's for 1.00.  

Option LEAPS should be used to take advantage of market overreaction.  This market has gotten Apple very wrong in the short term.  As the financial markets stabilize over the next few days, domestic investors as well as foreign investors will begin buying up shares in US companies. 

The first place they will look is to those companies with pristine balance sheets and Apple sits atop the list with zero debt and over $20 billion in cash.  Next they will look for companies which have been able to maintain high growth through the economic downturn.  Once again, Apple is at the top of the list because of their global market share growth opportunities. 

Now that the troubled financial institutions have been consolidated into a sector of strength, we will see the first real rally of the year and high growth/strong balance sheet companies will lead the way.  The time is now to take advantage of the panicked sell off and make this common sense portfolio move.

Disclosure: Long AAPL

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This article has 12 comments:

  •  
    Sep 19 06:57 AM
    one of the few bloggers that makes sense
    thank you
    Reply
  •  
    Sep 19 08:00 AM
    interesting. i've profited from LEAPs and options on AAPL before but unfortunately failed to sell quite a few and lost out a few times.
    Reply
  •  
    Sep 19 08:09 AM
    I went back to your May 30th post that it looked like we were at the bottom of the financial sector, that we should go long and that we were ready for a bull run in the 2nd half. Shoe after shoe has dropped. What makes you confident there are no more shoes... Can you comment.
    Reply
  •  
    Sep 19 08:50 AM
    Would have been a bit better advice yesterday, don't you think? I expect the January 2010 140s to open a bit higher than $30 - yesterday the 130's could have been had for $29 for much of the day.

    I generally wouldn't advise these options so close to the money because of the premiums they command over the price of the underlying (but this is highly dependent on the investor's risk tolerance). That said, I like deep in the money LEAPS as a means of increasing leverage, as long as the price premium isn't too high. Yesterday I bought Jan2010 90 calls for about 12% more than the stock price. Bully for me because I timed it well, but I intend to hold these until maturity so the short term move isn't a huge deal. Looks nice on paper, though.
    Reply
  •  
    Sep 19 11:07 AM
    Amending my comment, right now AAPL is at 141, and the Jan10 90 strike calls ask price is 62.85. The breakeven on this requires an increase in AAPL of 11.85, or 8.4%, over the next 16 months.
    Reply
  •  
    Sep 19 12:04 PM
    Hmmmm ... And to think Fast Money was recommending buying AAPL when it dropped to $120, **and** protective puts with a stop at $115... I'm beginning to think Paulsen is the the Dark Knight's Joker...

    jegan ;-)
    Reply
  •  
    Sep 19 12:15 PM
    Puts AND stop? One or the other, maybe...
    Reply
  •  
    Sep 19 01:09 PM
    Re: "Now that the troubled financial institutions have been consolidated into a sector of strength, we will see the first real rally of the year and high growth/strong balance sheet companies will lead the way."

    The first real rally of the year? What was the more than 1400 point advance in the Dow Jones between March 10 and May 2nd? Just how far are you predicting this rally will go?

    You're probably right about the Apple LEAPs. I bought some yesterday.
    Reply
  •  
    Sep 21 06:06 AM
    Yes, the company has no debt. Great. But what is that $20b in cash for? They aren't paying dividends out of it. They aren't investing it in their business. It's just sitting there, losing value as the Washington Clown College inflates it away. If you buy AAPL, 1/6 of what you're getting is T-bills. How exciting.
    Reply
  •  
    Sep 22 09:11 PM
    Are you nuts to recommend buying AAPL Jan 2009 $200 calls. 7 Major US & World Financial institutions have gone under, hundreds of thousands of high paying jobs lost, world economy on the verge of major collapse, this bailout is another disaster waiting to happen, we will be seeing major major inflation down the road and you think people will be buying expensive overrated ipods, macs, iphones with a $100 monthly plan. Like the MM's say buying options are for loosers unless you are being smart and buying it as insurance or a hedge. But with the volatility / premiums so high, it does not make sense there too.

    The $20 billion of cash would soon be if not already worthless with the USD printing press works overtime.

    The only thing which will keep value and preserve your wealth in this time of severe world crisis is Gold and Silver. That is the only thing which should be in your portfolio.
    Reply
  •  
    Oct 06 01:28 AM
    so you're recommending buying options right when the VIX (CBOE volatility index) hit an ALL TIME MAXIMUM since the early 90s? i have no opinion on AAPL, but it looks like youre recommending people to buy options right when they are at an all time high...
    Reply
  •  
    Oct 06 01:31 AM
    i just noticed this is from september! my bad...
    Reply
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