Profiting from Apple’s massive buyback program

“Call it the iPut,” Steven M. Sears writes for Barron’s. “If you believe that Apple’s recent decision to raise its stock-buyback program to $60 billion and sharply increase its dividend is the equivalent of a massive put that will keep the stock from suffering another sharp decline, attractive opportunities exist to trade against the stock’s newfound stability.”

“By selling puts on Apple and agreeing to buy the stock (AAPL) at lower prices should it decline, investors can collect hefty premiums from the options market,” Sears writes. “Indeed, a Goldman Sachs study released in 2009 supports the idea of selling puts on companies with large stock-buyback programs. The study concluded that buyback programs represent a persistent bid supporting stocks that can be exploited by selling puts.”

Sears writes, “Will Apple sell puts as part of its stock-buyback program? …Corporations often sell put options as part of their buyback programs. If Apple does the same, its put prices would almost certainly decline because heavy put selling lowers implied volatility, which is the most critical part of options-pricing models. An Apple spokesperson declined to comment, ‘at least not at this time,’ on whether put selling is part of the buyback program. All that is known thus far is that Apple will begin buying stock under the authorization this month and complete the buyback program by the end of 2015.”

Read more in the full article here.

8 Comments

    1. Free markets work because people can take both sides of transactions. In the stock market, there are always people who think the price will go up, and others who think the price will go down. Correct positions are rewarded wither way.

      By the way, selling puts is not a bet that the stock will go lower.

    2. Every stock transaction consists of a buyer and seller, one of whom believes that the stock will go up and another who often believes that the stock has peaked, at least in the near term.

      There is nothing inherently wrong with stock options – calls and puts. I don’t like naked options, because the speculators employing them can increase risk for everyone, particularly when the speculation grows out of control.

  1. Selling puts is not a defensive strategy, it’s bullish. For Apple it would be okay because they are buying stock. If the stock drops, they buy more shares cheaper while the put increases in price. They lose the put but the downside on that is limited since they can buy the stock at a lower price. If the stock price goes up, they lose the put but it doesn’t matter since it was insurance anyway.

    For the person on the street, selling naked puts is a little dangerous if you don’t own the stock. Any naked call or put is just madness since losses can be infinite.

    Most money managers go naked on put selling or put shorting if they believe the stock is going to rocket. Signs are there that this could be happening now with technicals calling for a low of 390 when the stock was trading at 460 and expectations for it to go higher. Usmanov has spent over 100 million investing in Apple alone. Essentially the call is bullish, but if you don’t have millions do straight up calls that are either deep in the money with plenty of time left in them, ie April 2014. Don’t copy the so-called money managers with naked puts you will get fried.

  2. I just think it’s a shame that the only way Apple can be valuable to shareholders is by going through a whole lot of financial acrobatics. Google doesn’t have to do anything but bring in revenue and profits to raise it’s share value. No dividends or stock repurchases necessary and yet the share price is almost twice Apple’s share price. I really don’t see how Google is that much better than Apple as a profitable company. Surely it couldn’t hurt Apple to start up a search engine if that’s where the money is.

    1. Google doesn’t need to do anything except steal other people’s ideas and IP and just wait and not care about anything, spy on their customers, have their company representatives babble BS regularly and see their shares rise. Correct.

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