Posted July 27, 2013 19:36
Much has been talked about the tremendous decline in Apple shares since September of 2012. Analysts have gone from loving this stock to despising it. From a long-term perspective, I think that it may be time to buy Apple shares. Why, you ask? Let me explain.
From a technical perspective there are many reasons to be bullish. First, Apple recently had a double bottom in which Apple shares touched a low of around $390 per share and successfully bounced off of that level. In most cases, when stocks do that, they tend to rally from that point on. Secondly, Apple has been in a short term uptrend since April; it may not seem that much, but Apple has rallied around 15% off the low to its current level of $440. In addition, Apple broke the long-term downward trend-line, which can be seen as a sign of a major bullish reversal.
Taking a look at Apple fundamentals, there may be no company that has stronger fundamentals than Apple. First, their PE ratio is 11, which implies that Apple shares have significant upside. Secondly, Tim Cook (Apple’s CEO) stated that Apple would have new products this fall and all throughout next year. I believe that Both of these things are reasons for Apple shares to rise by year-end, as investors will start to realize the potential in Apple shares.
The way that I would play Apple is through the use of call options. For a long-term investor, I think that the call options expiring January 2014 are very attractive here. The $500 Strike Calls cost around $8.75 ($875 per contract) at current levels. What this means is that if Apple trades above $508.75 by January expiration, these call options will be profitable. One may ask why go out to the $500 strike and not buy the ATM call (At-the-Money). The reason is, if let’s say Apple ends at $600 by expiration, the $500 calls will be worth $100 which means that these calls would have made over 1000%. Where as the $440 call (the ATM calls) which currently cost $25 ($2500 per contract) will have only made 540% ,or in other words, half that of the $500 calls.