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An Options Bet on Apple’s Continued Dominance

Barron's

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Apple stock may fluctuate, but the company continually executes at the highest possible level.

Most investors forget that fact and instead focus too much on what happens to the share price. The equity moves are important, of course, but it is Apple’s (ticker: AAPL) ability to operate one of the world’s greatest companies that matters most.

In recognition of Apple’s extraordinary position, Oppenheimer analyst Andrew Uerkwitz raised his price target on Apple shares to $125 from $105. He maintained his Outperform investment rating. Apple stock was up 1%, at $116.55, in recent trading. The S&P 500 was up 0.9%.

“We update our model for stronger than expected demand for all things Apple—notably laptops and iPads—due to the continued work/school from home dynamics,” Uerkwitz wrote in a Monday research note. Additional catalysts include an iPhone cycle that will support 5G. (Apple introduced some new products and services at an event Tuesday.)

To monetize Oppenheimer’s view on Apple, investors can sell cash-secured put options to profit from the strength of any advance—and to position to buy the stock at a lower price.

Puts give the holder the right to sell a stock at a specified price within a specified time. To cash-secure a put sale, investors take the amount of money needed to buy the stock, as indicated by the strike price, and deposit that money in their brokerage account. It remains there through the expiration in case the investor must buy the stock.

“Enough uncertainty still exists following the recent technology sector volatility to make put sales attractive,” said Michael Schwarz, Oppenheimer’s chief options strategist.

When the stock was at $111.95, Schwartz advised clients to sell Apple’s March $110 puts for about $12. Since the stock price has changed, investors seeking to follow his suggestion will need to adjust the strike price.

If the stock is above the strike price at expiration, investors can keep the put premium. Should the stock be below the put strike price at expiration, investors must buy the stock or cover the put at a higher price. Schwartz’s put sale idea creates an effective stock buying price of $98.

During the past 52 weeks, the stock has ranged from $53.15 to $137.98. Shares are up 60% this year and up 109% over the past year.

The March expiration is packed with events that could move the stock. Aside from this week’s product update, the expiration will cover at least two earnings reports.

The selection of an options contract that expires in six months is at odds with the main tempo in the options market. The vast majority of options trading volumes tend to expire within one month. The interest in near-term options reflects a desire of the market mob to risk the smallest amount of money to make the highest return in the shortest possible time.

But investors who like to sell options to generate income often focus on options that expire within six months, which are loaded with a “time premium” that drips out of the contract as it nears expiration. Should the stock keep advancing, the trades are profitable.

If something should happen to the stock that interferes with the profitability of the trade, the longer expiration provides enough time for the contract to be rolled to another strike price that erases some, if not all, of the problem. Think of the six-month expiration as the income-generation month for investors who lack the experience, or time, to monitor positions in real time and adjust accordingly.

Originally Posted on September 15, 2020 – An Options Bet on Apple’s Continued Dominance

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