What am I talking about?
I’m talking about the fantastic call that Chris Rowe and his daughter Maya made back in late April on Apple. In the article, “Is Apple Ripe for the Pickin’?”, he told readers that Apple was not a buy when it was trading near $600 per share. Rather, the recommendation was to hold off and buy a piece of this company at $535 per share or lower.
After I read his article, I took a closer look at the chart and made a mental note to myself that this was indeed a great price to get involved with Apple. And lo and behold, just one month after his article, the stock plunged right into that neighborhood. It actually traded as low as $522 per share.
Guess how much AAPL I bought at the recommended level?
Zip. Zero. Nada. I didn’t buy a single share. Now the stock is trading $40.00 higher, and I haven’t made a penny. How about you?
Well you have to let bygones be bygones, but I want to show you a way that you can still buy Apple below $535 per share and collect the stock's entire annual dividend of $10.60 in the next 49 days!
At this point, many of you loyal readers are probably thinking that I have completely lost my mind... but bear with me.
Putting Some Shine on the AAPL
Over the last several months, whether you’ve been reading The Tycoon Report or listening to Morning GPS, Chris, Teeka, Costas, and I have all been recommending high quality dividend names.
And I practice what we preach. Nearly every stock that I personally own pays a dividend. In fact, I generally won’t even consider a stock for an investment if it doesn’t pay a dividend.
Additionally, I’m generally looking for stocks that pay at least 2%.
Now I want to be clear about something. An investment is something that I anticipate holding onto for least six months, and if I like the way it’s performing, that could extend to several years. An investment is a stock or a bond to which I am perfectly happy committing my capital to for an extended period of time. This contrasts with a trade.
I’ll trade anything. Whether it pays a dividend or not, I don’t care, because I’m only going to be in a trade for a day or at most a month or two. Apple is worthy of an investment.
At its current level around $575 per share, Apple’s annual dividend of $10.60 produces a yield of only 1.8%. But at $530 per share, the yield is 2%. At that level, I get the yield I want and own a stock that could be the greatest growth story in our generation. It’s hard to find growth and a nice yield in the same stock, but Apple fits the bill.
Buying at a Discount and Getting Paid
The most obvious problem, of course, is that Apple is trading at $575 per share, not $530 per share. However, yesterday the July 530 puts, with the stock trading around $575 per share, were trading at $10.60. This is roughly the price I would be targeting, but once you understand the idea you can make adjustments that are appropriate for your individual situation.
Let’s break this trade down...
When you sell a put, you are obligating yourself to buy the stock at the strike price. In this case, you are obligated to buy AAPL at $530 per share if it trades below that price come July expiration. Because the put is sold for $10.60, if AAPL trades below $530, the breakeven for the position is $519.40. The breakeven for a short put position is determined by subtracting the premium collected from the strike price ($530 - $10.60 = $519.40). This means that, net of premium collected, you would own AAPL at a discount of almost 10% from current prices!
If the stock is trading above $530 on July expiration, you will not get to own the stock at that price, but you will get to keep the entire $10.60 in premium. That means that if you sell the put, you can collect the equivalent of Apple’s entire annual dividend in the next 49 days, whether or not AAPL pulls back to $530!
The Core Considerations
There are a few things you need to be aware of about this trade -- particularly if you have never traded an option before.
First, on the downside the risk is theoretically unlimited. If AAPL drops to $100 between now and July expiration, you will still own the stock at $519.40. But if you think about it, that risk is really no different than owning the stock itself. Owning any stock theoretically entails the assumption of unlimited downside risk.
Second, this is an expensive trade. Each option contract controls 100 shares of stock, which means that if you are assigned on the 530 put, you need to have $53,000 (100 shares * $530/share) available to cover the stock purchase. Part of that $53,000 will come from the premium collected by selling the put. In this case, one contract allows you to collect $1,060 (100 shares/contract * $10.60). Your broker will require you to have the strike price less the premium collected available to make this trade in a cash account, or $51,940.
This type of trade can be made on margin, which you should talk to your broker about. As a rule I don’t trade on margin when I am making an investment -- again this is different than a trade. Since I view this as an investment, it should not be done on margin.
So there you have it. Even if you missed the great chance that Chris talked about, you can still profit from AAPL. Come July expiration you will have either collected a full year’s worth of dividends or own the stock at a 10% discount, and then start collecting the dividend for real.
That is a risk reward profile that looks as good as a shiny, ripe apple.
Price Shock Trader