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Option Tip – Monday, October 24, 2011
Apple Calls



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The Option Tip of the Year – Apple’s Recovery Demands Call Play



AAPL-LOGO

The Street’s misinterpretation of Apple earnings report is certainly our good fortune!

The Street completely misread Apple’s (NASDAQ: AAPL) most recent earnings announcement, the stock took a bit of a hit, and now we have the buying opportunity of the year … maybe even the decade.

It was the first time that Apple has missed expectations since 2004 and the market recoiled amid fears that the death of Steve Jobs, its former chief executive and driving force, may have marked the end of the company's high point. Its share price closed up 2.25pc at $422.24 but fell 6.4pc to $395.05 in the hour after the results were posted, wiping $24bn off the company's value. This certainly sets the scene for the option tip.

AAPL-graph-102411



What Apple announced, everyone focused on the word “missed.” They missed revenue estimates. They missed profit estimates. But the message from the company that some people missed was, “The whole world was waiting for the new phone. They did not buy as many of the old phones. But now, we are sold out of the new phone and, by the way, we have a free phone for low-end users.”

In other words, everyone’s used to (only) hearing how much Apple “beat” expectations. And true to form, they did plenty of that — the company beat on iPad sales, Mac sales and margin expectations. Obviously the analysts needed to justify their spreadsheets and looked at the numbers and rated a “sell” or said “not to buy”. This is what helps make this a great option tip!

Description of Apple

Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide.

The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers. In addition, it sells third-party Mac, iPhone, iPad, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals through its online and retail stores; and digital content and applications through the iTunes Store. The company sells its products to consumer, small and mid-sized business, education, enterprise, government, and creative markets.

As of September 25, 2010, it had 317 retail stores, including 233 stores in the United States and 84 stores internationally. The company, formerly known as Apple Computer, Inc., was founded in 1976 and is headquartered in Cupertino, California.

The Reasoning for the Option Tip

AAPL-iphone4s

A point of consideration, for the short-term is the iPhone and its impact on Apple’s profit. A recent survey by ChangeWave Research/451 Group showed enormous pent-up demand for the 4S, and the newest smartphone’s sales were more than double that of the iPhone 4 during its own launch period.

Plus, the company just opened up pre-orders for the phone in 22 additional countries. There’s no doubt that this stock will recover lost ground, and quickly.

The longer term prospects for Apple seem to be strong -- Apple is the world’s dominant brand in consumer electronics -- it has tremendous market share and, therefore, the stock has unlimited growth available which is vital to the option tip. Here’s why:

• The world market for cell phones of all kinds in 2012 is estimated to be 1.7 billion units. Apple’s share estimate is 110 million units, which is a 6.5% share.

• The world market for tablets in 2012 is estimated to be 72 million (JPMorgan (NYSE: JPM) estimates), with Apple selling 45 million to 50 million — a 62% to 69% share. However, this market is more like tablets plus their “displacement equivalents” — netbooks and very low-end laptops increasingly displaced by tablets — and in actual fact that market produces about 200 million units. Therefore, Apple has only a 25% share.

• The world market for computers in 2012 is estimated to be about 440 million units (Gartner Group). Apple sold 4 million Macs in Q3; with an estimate of selling 25 million in 2012 — that is a 5.7% share.

Chief Executive, Tim Cook – Provides Support for the Option Tip by Looking Forward

• Prediction that the tablet market, in which Apple has a massive lead, would overtake the PC market altogether, representing a "huge opportunity for Apple across time".

• Welcomes cannibalization of the market for laptops and desktops as it is increasing Apple's market share.

• International expansion emerged as a key driver for growth. Apple would replicate every part of its US strategy in China, which had "quickly become the number two country in terms of revenues" - and was also focusing heavy investments on Brazil, Russia and the Middle East, where the iPhone was enticing users to try a broader range of Apple products.

• The company shipped 17.07m iPhone handsets during the three-month period compared with 14.1m the previous year, but fell short of estimates of 20m.

• The launch of the iPhone4S had surpassed Apple's "wildest dreams". Sales of the device passed the 4m mark within three days of launch, setting a new record for any Apple product.

Excerpt from an article: “Apple stock to jump 25 pct over next year” - which helps support the option tip.

“Shares of a handful of large tech companies including Apple Inc, Oracle Corp and eBay Inc are likely to increase by more than 20 percent over the next year, according to Barron's. The financial publication listed 10 tech stocks as its top picks in its weekly edition on Sunday.

The No. 1 pick for 2012 is data-storage company Fusion-io Inc , which Barron's highlighted as a possible takeover target. The paper placed a $52 price target on Fusion-io over the next year, indicating the stocks will more than double.

Barron's also said some larger technology names are primed for sharp increases.

Although Apple's earnings disappointed investors last week, Barron's said the stock could rise 25 percent over the next year. Apple shares on Friday closed at $392.87.

Barron's cited a likelihood for market-share gains and increased sales of Apple's latest iPhone model, as well as the potential for share buybacks or a dividend under new Chief Executive Tim Cook. Another plus for the option tip.

Apple rounded out the Barron's list at No. 10.”


Apple is the world’s best consumer brand. Its electronic products have the highest level of consumer satisfaction. It’s the largest market cap company in the United States. And it has 6.5%, 25% and 5.7% share in its target markets, not to mention margins that are almost double that of their primary competitors. These facts present a very bullish aspect for Apple.

The Option Tip

The option tip is to buy call options.

The Apple January 2012 and the January 2013 calls are worth consideration. If you buy the out-of-the-money calls — that is, with strike prices above the market price — you get more leverage as it moves up.

Also, a point of consideration, is that there are less players in the Apple options pit at the moment which means that prices are not being driven higher.

AAPL-options-102411



If you already own Apple shares, or intend to purchase same, then another option tip here is to write calls (“Sell to Open”) against your long stock all the time.

The great thing about selling calls against your long stock (i.e., the covered-call strategy) is the income you can bring in on a regular schedule. The covered call isn’t a “one and done” strategy – you can keep doing it again and again. That money not only helps bring down your cost average for the shares, but it also ensures that your bottom line keeps growing with every trade.

From time to time, however, it is recommended to take some of that cash income out of the markets — I believe it’s important to enjoy your returns along the way.


“An apple today should be a profitable play.”


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