“Apple Inc. shareholders should use bullish options to boost returns because shares… may climb in the next four months on increasing smartphone and Macintosh computer sales, Credit Suisse Group AG said,” Jeff Kearns reports for Bloomberg.
“Equity derivatives strategist Sveinn Palsson recommended shareholders use a “call spread” strategy, buying a January $180 call and selling two January $200 calls, both of which expire Jan. 15,” Kearns reports.
“Credit Suisse analyst Bill Shope raised his share-price forecast to $200 yesterday from $175… He kept his ‘outperform’ rating on the shares, which peaked at $199.83 in December 2007,” Kearns reports. “‘This trade will double the returns on Apple between $180 and $200,’ Palsson wrote. ‘Should Apple advance to $200, one stands to earn returns as if it had advanced to $220.'”
Kearns reports, “Options are derivatives that give the right to buy or sell a security at a set price and date. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.”
Full article here.
[Thanks to MacDailyNews Readers “Judge Bork” and “Carl H.” for the heads up.]
“Equity derivatives strategist Sveinn Palsson recommended shareholders use a “call spread” strategy, buying a January $180 call and selling two January $200 calls, both of which expire Jan. 15,”
“‘This trade will double the returns on Apple between $180 and $200,’ Palsson wrote. ‘Should Apple advance to $200, one stands to earn returns as if it had advanced to $220.'”
Derivatives is one of the problems with the market today and one of the big factors that ended up in the economic down turn. I think derivatives should be band from the market. Because this results in what amounts to basically a computer phantom Naked Short Sell. The only difference is you can’t get hit for a Naked Short because you never technically sold or bought anything.
Don’t mess around with AAPL Options. Period. Yes, I’m talking to you.
Demon,
If you want people to heed your advice, it would behoove you to first learn the differences between “band” and “banned.”
There is absolutely nothing wrong with derivatives such as stock options. To imply that these types of derivatives may have been the cause of the current economic global mess would be ignorant of the vast differences between various derivatives that are traded in today’s markets.
Stock options are types derivatives where actual value (intrinsic, plus time) can be easily determined, and where the value of the underlying security (price of the stock itself) is also easily determined. In other words, while you may be gambling by buying some January 10 call options of AAPL (expecting that AAPL would go up), the current value of those options is always very much tied to the value of the stock itself, which is always very much tied to the performance of the company, economic climate (and the health of its CEO, if the company is Apple and CEO is Jobs…).
The point here is, derivatives that got us into this mess were based on the speculative value of mortgage loans that were sold to clients who were not qualified, and who defaulted when the real estate market bubble burst. In essence, the actual derivatives that represented majority of massive profits (indeed, assets) of several large banks and investment companies, were valued based on a chain of interdependent securities and other derivatives, and several links along that chain were purely speculative, and not directly dependent on the value of another.
Options are an excellent profit vehicle for those who know how to use them. They are even better asset insurance (against major downturns) for the same people. For the inexperienced, they are exactly like Vegas — the house always wins…
@Tired of Retards
The typo police have spoken…
@Predrag great summary!
Concluding that options are responsible for the current financial crisis because they’re derivatives, would be like blaming redheads for the Holocaust because they are people.
Excellent response Predrag, I myself own about 100 shares of aapl and use protective pug to maintain my account value. I also bought 10 contracts of aapl
Jan 220 calls on 7/24 for $1.55 per contract and recently them on 8/25 for $2.18. So my $1550 investment earned about 33% in about a month. While I agree with the authors premise , a bull put spread may be the better play here. The reason being this is a credit trade ( no put of pocket expense) and the dreary would be greater. By the way during my hold on those 220 calls the stock onlyvmoved 10 points.
As somewhat of an expert in options, I can sincerely warn people not to venture into this sort of thing until you’ve studied the topic FOR AT LEAST ONE YEAR because there is a lot of stuff to read (and most of it is crap).
Otherwise you could end up losing all your money. No kidding. When you are looking at a possible 10x or even 20x return, you’re going to get greedy and “bet the farm” on a “sure thing.” Look at how many times you thought AAPL was going to go up, and instead it went down again.
Don’t be fooled. You’re betting against experts (like me) because it is a zero sum game. Just ask yourself, WHY WOULD ANYONE SELL YOU OPTIONS if they thought they’d lose money doing so? (And why are these “bankers” telling you to buy bull call spreads? Or, worse, short puts?).
If you don’t even know what I am talking about, you have a ton of learning to do.
PS – look at the article. This dude tells you to go long $180 and short two $200. (Buy the $180 and sell two $200). This opens you to UNLIMITED UPSIDE RISK on what is called a short ratio spread. You are f*cked if Apple’s stock price rises above $220 (at which point your profit on the $180 is cancelled out). If it goes to $250 by January, you have to pay 100 x $30 = $3000 USD for every one of these things you trade. When you sell a call, it means you do NOT want the stock price to increase. Once again, if you think this is confusing, hahaha, this is not even the tip of the iceberg. It’s like kindergarten level for options. BE WARNED MY FRIENDS!!! I know what I am talking about.
“SEC investigators had met Madoff in response to complaints, including a 2006 session where he was asked how he achieved his returns on investment. “Madoff never really answered the question,” Kotz wrote. “Madoff claimed his remarkable returns were due to his personal ‘feel’ for when to get in and out of the market.”
Because the staff lacked understanding of options trading, “they did not appreciate that Madoff was unable to provide a logical explanation for his incredibly consistent returns,” Kotz wrote. “Each member of the enforcement staff accepted as plausible Madoff’s claim that his returns were due to his perfect ‘gut feel.’”
The interesting note is that no thought to what if the market goes down in Sept / Oct? Apple will go with it, so the trade could be a total loss very easily.
MacMan:
You seem to have forgot, in your math, about the calls he bought. So, the correct math in your scenario, at the end of 3rd week of January, looks like this:
AAPL at 250 (presumably)
January 180 Calls: $70 per share ($7,000 per contract)
January 230 Calls: $30 per share ($3,000 per contract)
Therefore, the 230 Calls would have to be bought to cover for $6,000 (having bought 200 contracts, as the article suggests), using the profits from the sale of $180 calls, leaving $1,000 in profit with zero investment.
AAPL would have to finish above $280 before this bull spread begins to lose money. In other words, as long as AAPL stays below $280 before expiration in January, the spread makes money WITHOUT investing ANY of your own money into it (buying $180 and selling $230 calls cancels each other out).
Obviously, if the stock tanks and goes below $180, you lose nothing, since you presumably invested no money of your own into the stock.
I hate it when I don’t proofread before submitting, and slight typos creep in, confusing the reader.
Here again is simple math. The article suggests:
Buy 100 contracts of Jan 180 calls
Sell 200 contracts of Jan 230 calls (these two should cancel each other out)
As long as AAPL finishes between $180 and $280, the trade will make money for the owner (max. $2,000 per contract if AAPL is at $200, or less, if it is higher, or lower than $200). If it finishes blow $180, there will be no profit or loss (both options expire worthless). If it finishes above $280, it loses money, because you have to buy back those $230 contracts for more than what you get for selling the $180 calls, or come up with the underlying shares to sell them at $230 to the owner of your $230 call contracts.
Predrag,
Good stuff!!