I use Google Finance (along with my broker) to screen stocks daily, and it’s just impossible not to talk about Apple (Symbol: AAPL).

With growing revenues and net incomes, an insanely attractive P/E (around 12), a healthy dividend, and rumors of more products yet to come, Apple is most likely underpriced.

Microsoft is arguably the best comparison to Apple, but virtually on every fundamental it is inferior (be sure to note the scale (y-axis) on the income statements).

The only note-able quality that Microsoft even has over Apple is its investments. But when it comes down to strictly an operation comparison, it’s kind of a joke.

Hence I believe Apple (Symbol: AAPL) is almost for certainly undervalued.

How to play this information (four options):

Go Long on Apple Stock (Symbol AAPL) and pray for a rally to the 700+ point range (About a 33% return + dividends)

Pros: Less volatility, collection of dividend, downward resistance.
Cons: Limited profitability due to lack of leverage. Large capital requirements for size-able return.

Buy a LEAP Option on Apple (Option Chains shown below). For example, $10,145 to control all of the upward swing from now till Jan 2015 on 100 shares (1 contract).

Pros: Less volatility than a short-term option or a butterfly option. Very large potential net gain due to leverage (If stock went to $700 by Jan 2015, 67.5% return). Less capital requirements.
Cons: Leveraged bet that this stock will at least go to $631.45 (Breakeven) by Jan 2015. $664.92 would give approximately the same return (33%) as the first option, ignoring dividends. Don’t forget Option Expiration.

Call Spread, You buy a call and sell a call above it. Example: Buy $530 call ($101.45) and sell $540 call ($96.00).

Pros: Low capital requirements. If stock finishes anywhere above $540 you would have gotten $10 for your $5.45 which is an 83.4% return.
Cons: Limited Profitability, Potential for someone to early exercise to capture dividend, slightly complex liquidity due to holding a call spread, margin requirements, and of course option expiration. All very important to understand before buying a call spread.

Buy Tech ETFs (Option or Stocks) that have APPL and a mix of other tech companies

Pros: Diversity and if Apple tanks and the rest of the market avoids the crash, you mitigate your losses (unlikely in my opinion)
Fees, May contain stocks in the holding you don’t believe will perform well, and your avoiding selective targeting for maximum profit.
As for me personally? As I mentioned yesterday I sold out of a large portion of my portfolio, but I kept two ETFs that have a large AAPL component. As much as I hate call spreads because of the dividend capture and margin requirements, I can see call spreads being a solid play (and maybe not just for LEAPS).


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Filed under: InvestingOptionsPersonal Portfolio Update

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